The Destructive Power Of Intrinsic Targeting

| About: Alphabet Inc. (GOOGL)

Summary

Web ads are sold through knowledge of specific people, a process called intrinsic targeting.

This has led to clutter, to falling rates, and to the death of journalism.

Ads focused based on the copy next to them, and the audience reading that copy, work better.

Ever since the Web was spun, ad companies have focused mainly on what is called intrinsic targeting.

The idea is that an ad is a service if it is aimed at you, rather than just matched to what you are reading. If this Web page has an ad for Amazon.Com (NASDAQ:AMZN), chances are that's based on intrinsic targeting. If it has an ad for Scottrade or some other broker, that's extrinsic targeting.

The whole journalism edifice was built on extrinsic targeting. A publisher would aggregate an audience based on shared interests - a place, a lifestyle, an industry - and earn a premium cost/thousand from advertisers who sold to those people. They could prove that value with numbers. Newspaper guys could show an auto dealer how many of his customers read their paper, and magazines could show paint wholesalers how much of their market read about paint.

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has made intrinsic targeting dirt cheap. You can buy a specific zip code. You can buy only blue-eyed blondes aged 30-44 with incomes over $50,000 in the Dallas-Ft. Worth Metroplex. You can do all this at "run of network" prices - paying no premium for showing ads only to your target.

Now there will be some slop-over, and there will be waste, in such a buy, but you will reach your target, and you won't have to pay a premium to do it.

Search algorithms, big data and cloud computing have thus destroyed the market for journalism. There is no premium available for a narrowly defined audience.

There is another trend, also going back 20 years, that is making this game untenable. That is, it's just as easy to put two ads on a page as one, just as easy to put four on as two, etc. (Many Web sites are going to a TV model because TV is linear, and only takes one ad at a time.) In the 1990s early Web search engines like Excite and Altavista grabbed hold of this reality and started piling tons of ads on their pages. The amount of ad inventory skyrocketed and prices plunged. Google's second innovation, then, was a cleaner, less-cluttered look, ads separated from copy and limited in number.

Consider the current fight over ad blocking. Google itself does not mind some limited ad blocking. Things like pop-ups, pop-unders and pop-overs were around 20 years ago, many were not created by the sites serving content, and the whole mess came crashing down with the dot-bomb. Now sites desperate for revenue are back at it, and the war is on. Users hate the intrusiveness of current advertising techniques. Sites see this advertising as the only way to compensate for deteriorating intrinsic ad rates.

Apple (NASDAQ:AAPL) is now said to be targeting Google through support of mobile ad blockers but Google is no longer blocking these apps at its app store.

What's actually happening is yet another attempt by the Web's big players to reduce ad inventory.

Former editor Walter Isaacson, now with the Aspen Institute, has been pushing the idea of micropayments for years, and lately has been pounding the table for Bitcoin as a medium for such payments.

But advertisements, aimed at defined audiences, using extrinsic targeting, are a form of micropayment. They are a very effective one. You probably don't mind the ads for brokerages and other financial services here at Seeking Alpha. You expect them. Many offer a service that is relevant to you as a small investor. That is extrinsic targeting.

The solution for the ad wars, and the problems of journalism business models, could actually be the same. Extrinsic targeting. Publishers need to take back control of their own ad inventory, limit how much they offer, prove the value of their audiences, and seek sponsorships, long-lasting relationships, as opposed to mere ad sales. Small, local, blog-born sites are now doing this. Sites that do this are not getting rich but they're making a living. More publishers need to consider doing this - re-setting their relationships with companies that sell Web advertising.

If Google doesn't want to be fighting this war over-and-over-and-over again, it needs to embrace extrinsic targeting and the need for premium prices aimed at defined audiences. In Web advertising, less really is more.

Disclosure: I am/we are long GOOGL, AMZN, AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.