The issue came to light  in October when a plague of phony insertion orders compromised major publisher sites including The New York Times, Foxnews.com, The Huffington Post, and Gawker, culminating in Starcom MediaVest Group’s request for a Federal investigation (see MediaPost or AdAge coverage). Fraudulent practices range from malware distribution, which appears to be on the rise (see Click Forensics’ alarming report, declaring that click fraud perpetrated by botnets, a result of malware distribution, has risen sharply) to the grey-hat technique of the month, “invisible advertising.” (Is it fraud? You decide. But it certainly isn’t the kind of thing that’s going to ease any brand-conscious minds.)

On the defensive side, AdSafe Media has set itself up to provide rating and filtering services for advertisers, which could help solve the website half of the problem (MediaPost), while sell-side optimizers such as The Rubicon Project, PubMatic, and AdMeld have been promoting their abilities to help publishers filter the advertising side. (PubMatic, incidentally, held an Ad Revenue conference of its own on October 8th which I attended and found quite good; see recap here.)

The bottom line is, major brands are going to continue to be skittish until these incidents calm down, but the incumbent leaders on the publishing and media agency sides should smell an opportunity here. Their common adversary, comprised of certain ad networks that are widely seen as depressing prices and arbitraging profits out of the system, is arguably also contributing to a general climate of low security by removing personal contact and active scrutiny from the marketplace. But the fact that premium players have also recently been successfully targeted suggests that they need to do more to distinguish themselves as safe – and thus worthy of premium pricing and greater spending allocations.

Publishers and agencies have a chance to take the upper hand on this issue, but they’ll have to move quickly. They need solid solutions of their own before someone like Google takes the reigns.

On August 10, 2009, Publicis Groupe SA announced that it had agreed to acquire Razorfish from Microsoft for about $530 million in cash and stock.

(Razorfish, in case you haven’t been following, is a top interactive agency that Microsoft picked up as part of its acquisition of aQuantive in 2007 that gave it the Atlas family of ad servers and an online ad network. Razorfish is doing some of the best work in the business and they will be an asset to Publicis’ VivaKi “digital holding company” which includes Digitas and Performics (recently acquired from Google) and many other leading agencies, putting Publicis at the front of the pack of ad holding companies (WPP, Omnicom, Interpublic, Havas, and Dentsu) racing to incorporate digital services as a centerpiece of their offerings.)

But also included in the deal, according to Publicis CEO Maurice Lévy, was “a five-year media-buying relationship. In return for buying a certain amount of display and search advertising on Microsoft properties, Publicis will receive better ad rates.” (see WSJ coverage).

What’s wrong with this picture?

Razorfish clients include Ford, Best Buy, McDonald’s, and Microsoft, and Publicis as a whole represents many more “premium” brands. Clearly, Microsoft can’t sell search advertising to these advertisers and still claim that Yahoo! is “exclusively” empowered to sell to this market without some clarification of terms. Microsoft declined requests for such clarification, but a Microsoft spokesperson was quoted in Forbes as saying, “the Yahoo! and Microsoft proposal had not yet been approved as an official partnership, and that he was ‘fairly certain’ that no deal would have been struck with Publicis if it ran counter to the Yahoo! partnership.”

Retaining the ability to sell premium search is, in my view, essential for Yahoo!’s future, for two reasons.

First, as Yahoo! and Google have both repeated frequently, the future of online advertising is “Search-Display Convergence,” which means both that search data will become an increasingly essential component of targeting display ads, and search ads themselves will come to resemble display ads in graphical and interactive richness. “Premium” advertisers, in particular, will want integrated campaigns that combine the targeting of search with the branding capabilities of display (and video, which is increasingly being incorporated into display).

Second, the next wave of growth in online advertising will have to be on the premium side. The new market that Google discovered of SMB advertisers buying keywords on self-service auction sites has shown phenomenal growth, but by now most of the customers who could benefit from this form of marketing are already involved. From here, it will be a technology-driven battle for market share which Microsoft is eager to wage (and Google, with Caffeine, appears equally up for).

On the other hand, among premium advertisers, the shift of media spending from traditional channels to online is still at an early stage, especially among CPG manufacturers which continue to spend many times more on TV and print but are compelled to follow consumers who have shifted their time to online activities far faster than the they’ve shifted their budgets. These buyers are looking for a partner on the media side that can provide massive reach and handle integrated, rich campaigns that are free from the perils they see in social media and user-generated content and sketchy long-tail pages that result from buying traffic blindly on networks. That need defines a potentially lucrative role for Yahoo!.

But not if their partner Microsoft is competing with them for this market by offering bulk discounts to major media buyers. Which is why I think the Microsoft-Yahoo alliance plans just got more complicated.

By the living room I refer, of course, to the future of television, and in particular the idea that video distribution to TVs and mobile devices will evolve to be more like the Internet, an environment which Google has found most hospitable to its brand of products and services. In video, however, Google has admitted that profit from YouTube has proven more elusive than originally thought. (At the last earnings call, however, Google CEO Eric Schmidt did say, “YouTube is now on a trajectory that we’re very pleased with.”)

Still, YouTube has been slow to penetrate the living room, where the real money is. Working with microprocessor designer MIPS Technologies, Google has already positioned Android for set-top deployment (see NYT coverage here), while also raising its involvement with addressable TV advertising with pioneer Visible World (see WSJ coverage here). The cable industry’s Canoe Ventures has played into Google’s hands by suddenly halting its already delayed addressable TV project. Make no mistake: bringing some Google targeting magic to TV ads could still be the company’s next gold mine.

So what does this have to do with On2? Three things:

• First, Google gets some important embedded infrastructure. On2 brings a wealth of online video distributor relationships who have been licensing its technology for some time, including Adobe, whose Flash platform continues to power the majority of online video (although Adobe has recently been migrating Flash from On2 VP6 to H.264), and, perhaps even more significant for TV, Sun Microsystems, whose JavaFX platform is embedded in the infrastructure of most standard advanced television platforms. Although On2 compression faces strong competition from H.264 from the MPEG group, Google can use it to help ensure that video compression remains competitive and non-exclusive. It may chose to open source the technology to achieve these goals, as has been its pattern with other core technologies, but in any case they can use the acquisition to assure the quality and economics of online streaming continue to improve.
• Second, it’s even more important to Google’s living room goals that the public Internet continues to develop into a reliable way to deliver high-def video to TVs in a “net-neutral” way: in other words, without cable, satellite, or IPTV telcos charging for quality of service or otherwise limiting video access to screens. This would allow Google, for example, to deliver “out-of-band” advertising options to broadband-connected set-tops that could be targeted using Google technology. Offering household targeting to broadcasters and advertisers, Google could beat Canoe Ventures to a lucrative exchange for targeted TV ads. But for that to happen, video compression needs to continue to make strides while remaining low cost. Many other things need to happen as well, such as the penetration of broadband TVs and STBs. Needless to say, this is a very disruptive notion for TV, so resistance will be strong. But compression could be an important factor.
• Lastly, as Google moves to balance control of video standards among companies that include Apple, Microsoft, and Adobe, ownership of On2 gives them leverage to ensure its platforms (Android, Chrome browser, Chrome OS, Apps and Gears) include native video capabilities that are independent of control or licensing by any of its potential competitors. (For a deeper look at this landscape, check this blog post from EDN Senior Technical Editor Brian Dipert.)

All in all, I think more “ads by Google” on video screens beyond the PC are coming fast.

I spoke with Anchor Intelligence’s VP of Product Management and Marketing, Richard Sim, and Product Marketing Manager, Carrie Bourguignon, about these issues, and in particular about the curious observation that, of the top 30 countries by click volume, the one with the highest rate of fraud – 48.3% – was Vietnam. While there’s no simple explanation for this, it does highlight the point that click fraud and similar enterprises, like phishing, often take root in emerging economies where access to Internet technology has begun to outpace legitimate economic opportunity.

For those unfamiliar with this dark area of Internet commerce, a typical click fraud scheme works something like this: an operator first must recruit a large bank of computers to automatically click on pay-per-click ads on demand – this can be done either by paying willing accessories, or, more elaborately, by deploying a virus like Conficker to support such activity by remote control on unknowing users’ machines. (Note, Conficker was mentioned by Mr. Sim at Anchor, but there appears to be no evidence that this specific virus was used for this purpose.) The operator then sets up a web site or farm of web sites, often using a “parked domain” to attract some “legitimate” traffic, and proceeds to sell advertising space through a CPC network such as Google AdSense, AdBrite, or any of a large number of similar networks. As the ads start to appear, the operator activates his automated click network and the money starts to flow.

Beyond the obvious caveat emptor for click advertisers, there’s a point to be made about the emerging world of apps on alternative devices such as smartphones and Internet-connected set-top boxes. PCs have been the subject of an ongoing cat-and-mouse game of virus protection for years, but newer Internet-connected devices are green field opportunities for black-hat enterprises, especially those that seek to exploit the exploding demand for accountable advertising on digital devices. As I happily explore the world of Apple TV hacks, for example, I can’t help wonder what that little box might be doing all the time.

So it’s safe to predict a bright future for security solutions in advertising.

So far the Internet has not been kind to incumbent media businesses: it’s taken down directory publishers, music labels, and newspapers. But the story of Internet-driven disruption is largely a tale of unintended consequences. Google certainly didn’t set out to disrupt newspapers, it just happened to be a side-effect of its mission to index all the world’s information. Nor was Craig of Craigslist out to kill the classified ad business. Similarly, I don’t think Cablevision intends for Network DVR to disrupt TV broadcasting. But…

There are four events of the past four weeks that look to be harbingers of end of TV as we know it. These are U.S.-centric developments, but, when it comes to the TV business, America holds disproportionate sway. (In fact, some have argued that America’s domination of television bears a direct connection to its global dominance in other areas; see Erik Barnouw’s highly recommended Tube of Plenty: The Evolution of American Television for a discussion of this and other issues.)

The four events are:

• The Digital Transition, which officially shut off analog broadcasting in the U.S. on June 12, which has left broadcasters scratching their heads about what to do with all their new digital transmission capacity
• The “TV Everywhere” announcement by Time Warner and Comcast, who plan to have the service extend subscription-based access control to online TV viewing based on industry-defined authentication techniques
• Canoe Ventures’ suspension of plans to roll out addressable TV advertising on cable TV anytime soon. The plan, called “Community Addressable Marketing” (CAM), would have given broadcasters the ability to offer ads targeted and displayed selectively to different viewer segments on cable TV. The abandonment of the plan illustrates the magnitude of the challenge presented by dependencies on legacy technology in the highly dispersed operations of the cable industry.
• The Network DVR decision, appeal of which was rejected by the U.S. Supreme Court, leaving broadcasters who were trying to stop Cablevision’s plans to allow consumers to “record” shows on virtual storage devices located in the cable cloud instead of their homes without legal recourse. (See Mike McGuire’s post here.)

Any of these taken individually would be pretty major news, but taken together, they point to some major instability in the ecosystem. The Network DVR decision, in particular, seems to be a fundamental game-changer for the economics of video-on-demand services (the line between VOD and Network DVR being increasingly hard to draw the more you think about it), as well as the economics of advertising, given the well-established tendency of home DVR users to skip ads. Of course Network DVR doesn’t have to allow ad skipping – online video services have clearly demonstrated the feasibility of making ads non-skippable even in on-demand content – but these features now appear to be a matter of negotiation rather than legal mandate.

So what do all of these have in common? Try this: they all indicate an increasing need for decision-makers at the highest levels to confront and understand the low level details of how technology is affecting every aspect the TV experience. High-level guiding principles no longer hold – we need storyboards and detailed flow charts to plan and negotiate business policies.

I once took a sales training class in which it was asserted that business executives spoke three different languages (and that the key to selling to them was to first determine which language they spoke). The three languages were: the language of CXOs, which speaks in terms of market-size and market-share, the language of VPs and Line Managers, which speaks in terms of revenues and costs, and the language of Directors, Designers, and Developers, which speaks in terms of features and functions. In general, the idea is that people turn off pretty quickly when you speak to them in the wrong language.

From this perspective, you could argue that the secret of the technology’s most successful leaders – Bill Gates, Steve Jobs, perhaps Eric Schmidt – was their ability to speak all three languages fluently, but mostly to see and exploit the subtle connections between feature-function thinking in the design details of products and the resulting major shifts they can produce in market share. Whether it’s tying the browser to the operating system, tying the device to the store, or – well, I don’t have one for Google yet, but you get the idea.

So, TV executives take note. You need to spend more time talking with your engineers (and analysts who can translate what they’re saying). In the words of Bob Dylan, “you better start swimming or you’ll sink like a stone, the times they are a changin’.”

As I waited, I could see from the teasers the angle that was being developed on the Internet segment: Facebook’s $10B valuation is an indication that we’re in a repeat of the dotcom bubble (smirk knowingly). I contemplated my options for key points to break out of this and came up with a plan. Something simple but pointy enough to break the monotony of condescending skepticism.

So, here’s how it went.

As you might have guessed, Live TV is not a medium I’ve mastered, so my plan was thwarted. Perhaps Dave Asman sensed where I was going when he cut to another guest. Fortunately, unlike Live TV, on the web there’s always a second chance. Here’s what I’d planned to say on this topic.

Asman: …but how will sites like Twitter make any money?

Me (second take): With respect, Dave, I think you might be missing the big picture here. Sure, some social networks might not survive and others might barely break even (or maybe get acquired by companies like Fox) and some investors will no doubt be disappointed because they were hoping for the next Google. But a lot of social sites will survive because they don’t need to make billions to fund their operations, which are steadily declining in cost. So maybe the question you should be asking is, assuming that some of them do survive, what’s going to happen to TV shows like this one when your sponsors discover they can reach your audience for a lot less money than they’re paying you? Social media means disruption – it’s hit the music business, it’s hit the newspaper business, and it looks like TV could be next in line. Think of people like Scott Monty, the head of social media at Ford, who’s able to broadcast his messages whenever he likes directly to over 22,000 followers, for free. Do you think Ford will be eager to continue paying millions of dollars to reach an undifferentiated TV audience with its commercials when Scott can put a link to a YouTube video in a Tweet and get massive exposure online for almost nothing? That kind of communication might not make Twitter wealthy – they’ll have to think of subtler ideas like selling marketing intelligence, or consumer data, or specialized applications – but it sure could change the economics of TV journalism.

The first half of the event was given over to Clay Shirky, who presented his characteristic big-picture assessment of historic sea-change in the nature of media. While the key messages, consistent with Bluewolf’s credo, were innovate, iterate, and be prepared to fail, the talk also had the effect of shining a spotlight on the elephant in the room of every Big Media gathering of late: once again, the Internet is messing with their business, intellectuals like Clay insist the changes are permanent and irreversible, and no one knows where this disruption will eventually lead for professional content.

With the crowd thus stirred, vendors took the stage to talk about how cloud computing could help. Representatives from Salesforce.com, Google Apps, and Zuora presented some compelling cases to illustrate how cloud computing not only cuts IT costs but can also create the right environment for rapid low-cost innovation and experimentation. It seemed as though Bluewolf may have gotten things back on message.

Google makes its case for Apps in media, photo by author

But then came the industry representatives: Dave Fox, VP, Commercial Services for Time Warner Cable, Mike Stoeckel, who had recently left his post as VP, Digital Products at Fox to join a media ad-ops platform start-up called Invision, Dottie Gallagher-Cohen, VP Marketing for The Buffalo News, and Daniel Hart, whose title, “formerly of MTV,” seemed to hint at some discord to follow.

Note to event organizers: be careful with panelists who no longer work for companies in the industry you’re targeting, especially if it’s media. Stoeckel laid into the media industry for its complacency following the Internet bubble which he pointed to as the main reason Google and ad networks have marginalized them online despite being initially inept at ad sales. Gallagher-Cohen, as the token newspaper representative, did not try to hide the stress and frustration surrounding her business, although she did claim that her paper’s innovative strategies were paying off as they were seeing CPMs rise (mostly due to the paper’s introduction of behavioral targeting) even as industry-wide rates were falling sharply. Hart, surprised to hear of rising rates in Buffalo, spoke wistfully of some of the great social gaming work MTV had done online with its sort-of-hit TV show The Hills, and suggested that someday media might understand how to monetize the passion of its fans, but today agencies and networks were still mostly locked in the outdated mass-media mindset of valuing reach far above audience dedication.

Things came to a head when Clay Shirky fielded a question about what kinds of business models he believed could sustain content production businesses in the future, given his points about the publishing’s catastrophic loss of scarcity. He pointed to examples like Cook’s Illustrated and Consumer Reports, which he described as successful “because consumers pay them not to take advertising.”  The audience flushed.

Afterwards, blue margaritas were served al fresco on the roof of the Bryant Park Grill under a warm, clear spring sky.

This positioning is about to take a leap forward as Google rolls out support for a technology known as ShopAds from Adgregate Markets (see Mediapost coverage). Ecommerce banners have been a long-sought Holy Grail of Internet entrepreneurs, but have generally been stymied by security issues. (For one thing, phishing attacks become much more effective when the perp’s URL doesn’t appear in the browser’s protected address field.) VeriSign has added its imprimatur to the transactions, but it’s probably safe to say that the security issue has not been laid to rest.

At the same time, Google CEO Eric Schmidt suggested during the earnings call that YouTube was looking at transactions as well, although he was a bit contradictory about timing: "We do expect over time to see micropayments and other forms of subscription models coming as well, but our initial focus is on advertising…we’ll be announcing additional things in that area literally very, very soon." Signing up studios such as Sony Pictures, CBS, MGM, and others to YouTube distribution will clearly bring pressure to accelerate viewer-paid models for long-form video content.

Then there’s the rising chorus of voices from the publishing world calling for the reconstitution of the “pay wall” around online news content (see, for example, Washington Post coverage). In his speech to the Newspaper Association of America last week, Eric Schmidt downplayed the idea that a micropayment solution for publishers was around the corner due to prohibitively high transaction fees, but said that “much work was being done on that technology to bring costs down.”

Right now, embedded transactions in standard display banners looks like the best bet. Simple back-of-the-envelope calculations suggest the yields on such units could dwarf today’s sinking display CPMs. Publishers need to resist the urge to gripe about Google or fret about pay walls and focus on how they can maximize their piece of that pie.

Advertising was an accidental discovery at Google, which has always seen itself as a technology company focused on search. With cloud services looming as the Next Big Thing in IT, will Tim’s departure accelerate Google’s shift from advertising to cloud services as the primary focus of its business?

There are some faint indications this might be the case. For one thing, CEO Eric Schmidt has indicated that Google seeks to replace Tim with “an internal candidate.” That could be a tall order, given Armstrong’s deep media connections, although former Doubleclick CEO David Rosenblatt looks like a strong possibility. For another, Eric Schmidt clearly prefers talking about the cloud to talking about advertising. "Cloud computing is one of those changes that’s going to happen regardless of whether companies that are participating in the ecosystem allow it, because the technology will make it happen," he said recently at the Morgan Stanley Technology Conference in San Francisco. That says a lot.

On the other hand, Google is a highly analytic organization that knows how to protect its revenue.  And if it needs to hire more Madison Avenue types to do that, I expect they won’t be too hard to find.

And what’s next for AOL? Tim Armstrong knows what he’s walking into – he was instrumental in putting together Google’s ill-fated $1B investment for 5% of AOL in 2005 – and his decision to join portends big changes for the organization, which has been searching for a new course for over two years.

AOL is an entity whose whole is worth less than the sum of its parts. It’s Platform-A suite consists of a number of strong ad platforms, such as ADTECH, Tacoda, advertising.com, Third Screen Media…all of which were leading products in their time. And the AOL network of consumer portals, tarnished as it may seem, continues to draw more visitors and minutes (271 million and 45 billion respectively in January according to Comscore) than Facebook, MySpace (or FIM), Twitter, or any other consumer portal with the exceptions of Google, Yahoo, and Microsoft. Still, all of these pieces never quite seemed to fit together right.

With the right kind of re-structuring, which is likely to involve major spin-offs to at least one of the aforementioned companies, perhaps Tim Armstrong could unlock the potential of these assets. But it’s going to take some challenging new relationships.

With the pool of revenue for online display advertising finally shrinking again, consolidation looks likely. Perhaps there’s something new for Google in there.

Google’s sensitivity to the volatility of privacy issues has prompted it to support its entrance into BT with actions that extend beyond public posturing to the deployment of a unique tool it calls Ads Preferences Manager, where users can control interest category membership and opt-outs, as well as a browser plug-in that addresses the principle limitation of current cookie-based opt-out systems, which is their vulnerability to cookie deletion. Google also indicates it will provide more transparent information around the ads themselves by including links that lead to details about the program. (The Wall Street Journal offers additional coverage.)

This is an important step, both for Google and the online advertising industry at large. Google’s actions clearly raise the bar on transparency and user-control over BT, and will likely force Yahoo!, Microsoft, and others to respond by offering similar more-granular control of ad preferences, which is likely to have an overall effect of drawing more attention to the practice in general. BT is already under growing scrutiny by the FTC (which recently stopped short of new regulations) although it has yet to penetrate public awareness in a meaningful way.

It’s hard to predict the magnitude of public response to innovations in targeted advertising and privacy issues in general, which is why Google needs to be so cautious here. On the one hand, Facebook has repeatedly drawn fire for perceived privacy issues practically every time it tries something new; on the other hand, when Yahoo! announced search retargeting two weeks ago, the response was much more muted than many – including myself – expected. The beauty of Google’s approach is, whatever happens, it looks like they can’t really lose.

If Google’s push into BT does force its competitors to offer similar transparency and control, and if this in turn raises the profile of BT and causes the public to take more notice and increase use of opt-outs while demanding more control, then the overall effect will be to weaken the effectiveness of BT as a targeting mechanism, just as increased cookie deletion and browser privacy settings have done in the past. Google wins because most of its advertising uses contextual targeting, rather than behavioral. True, there’s some vulnerability to a widespread backlash and a retreat would have costs, but ultimately Google has the least to lose if BT gets busted.

On the other hand, if consumers remain relatively indifferent, or even bother to improve and cultivate their Google-based interest profiles, then Google wins because it’s able to make good on the promised synergy with DoubleClick as a premier platform for display and cookies, along with its superior capabilities to analyze pages to correlate them not just with keyword targeting, but with highly valued behavioral categories as well. And it gets to offer a new one-stop shop through AdWords that leverages the promised ability to bring “the science of search to the art of display,” as Eric Schmidt recently put it.

While there will no doubt be critics who single out Google as a privacy risk whose scale puts it in its own class, they seem to have thought this one through.