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.

“Logic and over-analysis can immobilize and sterilize an idea,” Bernbach said, “It’s like love – the more you analyze it, the faster it disappears.” Such notions seem quaint today, in the age of web analysis, as data and analytics guide marketing and publishing budgets and increasingly become the currency of media. While some lament that digital over-analysis is indeed taking a toll on the creative quality of commercial communications, creative developers continue to take solace in the fact that they still hold sway in the design of Flash experiences, whose effects will be evaluated later – for now. And many have dutifully been instrumenting their designs with tracking pixels for years to make them more transparent – with mixed results.

But what happens when they’re introduced to their new cube-mate, an analyst trained in Omniture products who will look over their shoulder and suggest where to put the data collection tags and how to incorporate design elements aimed at real-time optimization? Such a collaboration might produce breakthrough results. Or it might not.

Bernbach is also credited with introducing the idea of the creative team consisting of a copywriter and an art director, which transformed how advertising was designed. Before Bernbach, we’re told, advertising concepts were thought up by copywriters who handed them off to art directors to illustrate. The team concept energized and accelerated the creative process. (Developers may wish to draw analogy to the “pair programming” technique associated with agile methodologies.) Could teaming up creative developers with analysts using a common Flash platform produce similar benefits? Well…

Creative developers tend to be holistic, “right-brain” thinkers who may naturally resist decomposing concepts into measurable units. Analysts tend to be reductionists, inclined to embrace such decomposition and measurement. Top-down organizational initiatives are unlikely to address the issues impeding their successful collaboration.

So, while most commercial web development interests appreciate the need for increased transparency and accountability in their efforts, the question of how best to integrate analytics with web design as a practical matter remains thorny, and the impact of Adobe’s integration efforts will depend not just on Adobe’s execution, but on industry-wide attempts to evolve the web development process in line with Adobe’s vision.

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.

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.

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.

Yahoo! has not been idle on this front, and last week they put some meat on the bones by announcing Rich Ads in Search, which brings more art and interactivity into the search results picture, which will appeal to brands, and probably to some consumers as well. The only folks who will take exception are those for whom the utilitarian serenity of search results pages is sacrosanct. Anyway, this is one half of the convergence story: bringing display branding quality to the search environment.

Today (Thursday) at the IAB annual leadership meeting in Orlando, Yahoo! gave form to the other half when it announced “search retargeting,” which gives it the ability to allow advertisers to target display advertising based on a user’s search behavior. In Yahoo!’s words:

…for example, if you searched for “Toyota Prius” Yahoo! will be able to serve display ads for Toyota Prius to that user across the Yahoo! network

Actually, search retargeting is one of three new ad products announced, but to my mind, by far the boldest and most potentially controversial.

First, the upside: there’s little doubt that search retargeting could significantly raise the yields on a lot of long-tail display ads across Yahoo!’s network, where CPMs have been melting in the heat of a bad economy. At the same time, it could raise the quality and relevance of those ads as established brands take notice, making for a better consumer experience, and the brands themselves could get much better value out of targeting based on search-powered relevance. A win for everyone.

Now for the hard part. As of this writing, we’re probably hours away from a response from privacy advocates that’s unlikely to be warm.

The FTC recently seemed to hand marketers and portals a victory over privacy advocates by backing self-regulation for targeted online advertising, which has raised hackles and perhaps primed them for a fight. For its part, Yahoo! has taken great care in the past to burnish its privacy credentials and certainly needs to avoid a privacy flare-up at all costs, but privacy reassurances were surprisingly absent from this announcement, as were implementation details that might enable one to form one’s own conclusions. It must have been a difficult public relations decision whether to call out the issue or not.

So, if you’re searching for a divorce lawyer on Yahoo!, will your spouse get tipped off the next he uses the PC and notices his Yahoo pages are plastered with divorce lawyer ads? Not likely: Yahoo! is bound to be very selective of categories for this kind of targeting, and offer clear opt-out mechanisms if you don’t want your search to be targetable. But will this create a new cache of retained search data, prized by thieves and despots? No, I’m certain Yahoo! will correlate search terms with behavioral categories on they fly without retaining anything specific, just as Phorm does, and head off this objection from the start.

What’s more, Yahoo! is not the first display advertising network to offer search retargeting. AOL’s Advertising.com, WPP’s 24/7 Real Media, Microsoft’s DrivePM, AudienceScience, even Yahoo’s own BlueLithium network have all offered some variation on this for at least two years, although none with scope of Yahoo!’s new offering. Only Google, it seems, has for now avoided this form of search/display convergence. Perhaps they’ll wait to see how Yahoo!’s effort plays out first.

Nevertheless, I think this will be worth watching closely.

R/GA, whose marquee clients include a long-term relationship with Nike, for whom it not only created memorable advertising but also helped build an industry-leading platform for digital marketing, has broken the agency mold by putting technology at the core of what they do. (Of course, they’re not the only ones, that’s what digital agencies do.)

“There’s a couple different directions agencies will have to take,” says [R/GA founder and CEO Bob] Greenberg. “There’s a difference between us and someone like Crispin Porter + Bogusky. We’ve taken the direction of building brand platforms rather than viral stunts or one-off things.”

Speaking of Crispin Porter + Bogusky, another award-winning agency of iconic status with a different approach to technology, they recently scored a rare hat trick, winning 2008 (not-just-digital) Agency of the Year awards from Creativity, AdWeek, and AdAge. This is very impressive considering the somewhat dubious response its highly-touted (and very expensive) Microsoft campaign, starring Jerry Seinfeld and Bill Gates, drew last year. (I personally felt duped by it, having first attempted to take it seriously before it was abruptly curtailed in favor of “I’m a PC,” rarely to be mentioned again.)

CP+B’s “viral stunts” date back to the seminal viral campaign, “Subservient Chicken” for Burger King. They are, to my mind, the heirs of the “Mad Men” era of advertising during which the “big idea” reigned supreme, and creative directors called the shots (and were compensated on par with Wall Street executives).

Volkswagen advertising from Crispin Porter + Bogusky

How times have changed. CP+B’s campaign for Volkswagen could be a metaphor for what’s happening in advertising. Today’s agencies need more than a trophy case full of awards: they need to elevate quants and techs to equal status with creatives, and fundamentally change their approach by moving digital to the center of the picture, as R/GA and Sapient and AvenueA/Razorfish have done.

To refine this generic observation, Gartner last quarter surveyed a number of agencies and brand marketers in the U.S. and UK on a variety of topics from spending priorities to accountability. The results revealed some substantial areas of misalignment between agencies and their clients. The results will be published shortly on gartner.com (subscription required).

The growing importance of technology in advertising has not been lost on the agency world. WPP, for example, now (arguably) the world’s largest agency holding company, has been on something of an technology acquisition spree, having purchased or invested in numerous digital marketing companies over the past two years (24/7 Real Media, Spot Runner, TNS, VideoEgg, Visible Technologies, Schematic, Blast Radius, JumpTap, and most recently, Omniture). But acquiring skills is just part of the problem…integrating them into the business and culture is the bigger challenge.

 
Photo by author. Left to right: Tim Hanlon, Jim Spanfeller, and Brian Morissey

The panel consisted of Jim Spanfeller, Forbes.com (a premier online publisher), Tim Hanlon, ViVaki Ventures (a new digital agency unit at Publicis), Andrea Kerr Redniss, Optimedia (a media agency), and David Honig, Media6° (an ad network using social graph data for targeting).

The conversation began with the inevitable economy backdrop question, how bad is it for online advertising. The consensus of the panel was yes, things are bad, but they could be much worse and most expressed the view that things would probably improve in the second half of the year.

In discussing the potential effects of the downturn on innovation in the industry, Tim Hanlon raised the issue of secular vs. cyclical effects. Echoing the sentiments of Disney CEO Bob Iger, Hanlon explained how cyclical downturns make new things seem “superfluous and uncool.” In contrast, however, he viewed the changes in the media world as permanent, accelerated by the economy, and mostly predicted by futurists a long time ago. This is the inflection point, he said, when digital truly becomes the core of all media and marketing, and the only question for the futurists was, how could it have taken so long?

Against this consensus backdrop, a principle theme emerged: the convergence and competition between brand and performance approaches to advertising. The subtext is the question of whether publishers and agencies would continue to dominate the advertising marketplace, or continue to be disintermediated by data-driven ad networks. This naturally led to a reaffirmation of the value of creative, agencies as “big idea” shops at the end of the day, and the need for quants and creatives to learn to play well together.

Morrisey injected an observation from the conference host, Rubicon CEO Frank Andante, who drew a distinction between what’s happening today and the dotcom bubble meltdown of 2001. Last time, he noted, there wasn’t a lot of performance advertising. So when brands abandoned the medium, they left with all the revenue. Today, as David Honig noted, brands are looking for metrics and accountability. He also asserted that brands that pulled back in 2001 lost market share as a result and learned a lesson.

But brands still have not shifted the main part of their marketing budgets, and online publishers that relied on high-consideration targeted sectors like automotive and financial services are clearly suffering.

This led to a discussion of supply and demand and the effects on CPM, during which Jim Spanfeller observed that, while there’s pricing pressure across the board, the most acute pressure is on ad networks dealing in remnant inventory, which he described as being in “a race to the bottom.” Far from being bad for premium online publishers like Forbes, he saw this as a provincially good thing: Forbes doesn’t use ad networks (although they operate a couple of their own), and doesn’t anticipate using them, so if the recession squeezes their margins out of existence, well, c’est la guerre.

David Honig, the panel’s token ad network guy, agreed there would be a shake-out, but pointed out that, at the end of the day, “there’s a treasure trove of data in networks.” He explained how Media6° adds value to inventory by mining social graphs, and added he’s not paying 25¢ CPMs, but 10-15x that. There followed a well-worn discussion of who owns consumer data (publishers? brands? agencies? …certainly not ad networks…wait, it’s the consumer of course…after all this is the age of transparency), which in turn led to a consensus that there were two kinds of ad networks: good ones and “sketchy” ones. The sketchy ones were seen as arbitraging all the value out of the media and ripping data and traffic off from publishers while driving prices down to the bottom.

In summarizing the issue, Frank Andante suggested we look at this as a channel management problem. Manufacturers, he explained, have learned how to manage their retail distribution chains so their merchandise doesn’t instantly wind up discounted to liquidation prices on the street, the way online display ads do.  Which is where firms like Rubicon come in: to help publishers manage their advertising reseller channel and support their pricing goals.

Spanfeller suggested that many online publishers were simply unaware of how badly they were mismanaging their ad network channels. He described how last year, when IAB presented the results of its digital pricing research study with Bain, they were greeted with expressions of shock from the publishers in the audience. 30% of our inventory? 25¢ CPMs? We were just happy to get the checks, we had no idea.…

The current highest ranking link for “shankapotamus” for example leads here, to this apparently unaffiliated and unsuspecting blogger’s site. For those who missed it, the word comes from E*Trade’s hilarious and highly memorable ad. Loved the ad, too bad about the missing traffic.

So why are advertisers in an economy like this spending millions on Superbowl ads to light a spark of interest but neglecting to convert that interest to online engagement with search? This is not exactly a novel problem. Three years ago, in a legendary advertising coup, GM learned that Ford would be running a Super Bowl ad featuring Kermit the Frog to promote its FlexFuel “green” hybrids and bought the keyword “kermit” first, thus effectively drafting most of the web search traffic the ad generated. That same year AT&T rolled out “mLife” on the Super Bowl and was roundly criticized for having nothing for users who then searched for “mLife” online. I’d have thought the lesson would be clear.

Advertisers have gotten a little better since then, and not all of them missed the boat on search. GE, for example, ran this Scarecrow ad (check it out, on Hulu even the ads have ads), and bought “Scarecrow” on Google, but so did IBM, with the suggestive “Saw our Grid TV Ad?” …although their link appears to have no connection to the advertising. GE’s site, however, does a good job of expanding on its story and the ad contains a memorable URL, ecomagination.com, that also captures traffic (GE and IBM both bought that keyword too).

In fact, our most recent survey of marketers and agencies suggests that it’s the ad agencies, rather than their clients, that are lagging behind in cross-platform execution. The thinking is clearly there, but it seems organizational barriers are still hampering results. Clients should be demanding this from their agencies before they sign off on Super Bowl-sized campaigns.

The good news is, not only does the Super Bowl still generate buzz and sell out its advertising, but the buzz gets highly amplified by social media like Twitter and YouTube. If only the agencies could figure out how to connect the dots.

Two factors were noteworthy. First, Google continues to see strongest growth on its own search results pages, while growth on the Google network remains flat. This is good news for Google’s bottom line, as it doesn’t have to pay for traffic on its own sites as it does for AdSense partners, but for the partners, not so good. Secondly, and perhaps more worrisome for online publishers, is the negative growth rate of TAC itself (that is, the fees Google pays to sites in its network that carry its ads). Google showed a graph underscoring this negative TAC growth as a positive for shareholders, but, as the industry knows, Google is the financial wellspring for a great many websites, so negative TAC means less for the world at large.

The chart below illustrates how small adjustments in TAC can have large impact on the after-TAC growth of Google’s network revenue.

Might Google’s lower TAC rates open the door for more competition in the ad network world? Unfortunately for Google’s competition, Google’s reported TAC rate – the payouts divided by network revenue – remain at around 88%, significantly higher than what ad networks appear able to achieve, so it’s very unclear that publishers will be able to do much better elsewhere, particular since many reports indicate ad network display CPMs are dropping (here’s an example from PubMatic and another from The Rubicon Project [registration required]).

But will things change? One comment Google CEO Eric Schmidt made was telling in this regard. In the context of discussing the near-complete state of the DoubleClick integration, he remarked on the benefits of DoubleClick as being, “to bring the science of search to the art of display.” This was reminiscent of Yahoo!’s recent refrain about “search/display convergence” and summarizes why Yahoo! is reluctant to sell its search business to Microsoft. Microsoft has made similar observations, and when those three speak similarly of developments, chances are they’re for real.

Mr. Schmidt and others also talked about the accountability of search, and how accountability means that falling consumer spending is bound to reflect directly on search revenue. Beyond this is a movement, led by Microsoft, to revise the way accountability is measured for online advertising. Historically, by convention, credit for a sale or conversion has been awarded to the last event before the conversion, which has generally been a click on a search page – most likely Google’s search page. Last year Microsoft sought to change this when it announced “Engagement Mapping” which would count all exposures (e.g., banners) within a given period leading up to a conversion.

A recent Gartner survey has shown that advertisers and agencies in the main are still mostly using conventional metrics to calculate ROI, but perhaps increased pressure for accountability will accelerate a move toward broader considerations, which could reverse last year’s trend which showed search gaining share over display advertising online.

Google’s network advertising business (which includes both AdSense for Search and AdSense for Content), when you remove TAC, is only about 6% the size of its Google.com search revenue. But that (along with its still-tiny “licensing and other” revenue) is the portion to watch if you’re looking for an industry health-check.