Mad Men are watching you

YOU are browsing for lampshades on a department store's website. You grow bored, and surf across to the website of your favourite daily newspaper. Mysteriously, the lampshades follow you: an advertisement for the same brand appears next to the article you are reading. Welcome to the world of real-time bidding, a cleverer and nosier way of selling advertising that is beginning to shake up the online media business.

A decade ago online display advertisements, or “banners” as they were often known, were booming. Companies paid huge sums to appear on news websites. But, as the number of ads increased, people stopped noticing them. Now, for every 1,000 display ads that pop up, less than two are clicked on. Prices have slumped. Some media firms, notably News Corporation, have concluded that online ads will never bring in enough money to support a newspaper. Meanwhile search advertising, which reaches people when they seem to be interested in something, has grown from 1% of American online ad spending in 2000 to almost half, turning Google into a $172 billion company.

Conventional display ads are simply wasteful, says Jakob Nielsen of GroupM, a large media buyer. Say a company wants to reach young men. It might buy ads on the sports section of a large portal such as Yahoo!. But it will also be paying for the women who visit that page. If it also buys ads on the sports section of another large portal, such as Microsoft's MSN.com, it will pay twice for the people who frequent both web pages.

Real-time bidding helps solve these problems by allowing marketers to buy known audiences. Click to open a web page and an automated auction begins. Firms bid to serve an advertisement, taking into account where it will appear and what they know about the presumed viewer from digital traces he has inadvertently left around the web. The winner serves the advertisement, often customising it—so you may see more ads for convertible cars on a sunny day. The whole process generally takes some 150 milliseconds, or less than half the blink of an eye.

Many online ads—particularly the expensive ones that appear on home pages—are bought and sold much like old-media advertisements. A seller agrees on a price with a buyer, and then pays for lunch. But many publishers sell only one- to two-fifths of their online ads directly, says Jay Stevens of the Rubicon Project, a California firm that works with many of them. The rest are offloaded to digital middlemen. It is in this high-volume, low-cost market that real-time bidding is advancing. In the past year, says Mr Stevens, real-time bidding has risen from almost nowhere to capture 30-40% of spending.

Real-time bidding makes it easy to aim ads at susceptible eyeballs. Firms such as John Lewis (a British department store), Zappos (an online shoe-seller) and Lenovo (a computer-maker) know that you have visited their websites because they dropped digital markers onto your computer. They then outbid others to reach you again. This is called “retargeting”.

BSkyB, Britain's biggest pay-TV outfit, has used the technology to reach wealthier viewers who might be more interested in a new channel devoted to well-crafted American dramas. It has also taken aim at people who show an interest in 3-D television. And it has cut down on waste from trying to sell subscriptions to people who already have them. Matthew Turner, Sky's head of digital marketing, expects half the firm's online budget to go on real-time bidding within two or three years.

King Content v King Data

In the short term, what is good for advertisers is also good for ad sellers. Reducing waste raises prices. Laurent Cordier of Google says that retargeting can raise click-through rates five- or tenfold. Google now sells many ads on its Doubleclick ad exchange by means of real-time bidding, and is introducing the technology to YouTube, its video website. In 2010 display advertising actually gained market share in America, according to the Interactive Advertising Bureau. Search fell slightly.

But the growth of real-time bidding may prove highly disruptive. An auction system allows everyone to discover the real value of online ads. It also provides a wealth of data to advertisers about the behaviour of their target audiences. These days some media firms can charge relatively high rates for online ads on the grounds that their websites are frequented by the young or the affluent. Increasingly, advertisers are learning how to reach the same people on other websites, for less money.

As Mr Nielsen of GroupM puts it, the conversation between buyers and sellers of advertising is becoming unbalanced, with the former often armed with more data than the latter. Some media firms have responded by selling fewer ads through middlemen, in real time or otherwise. But that may mean ads go unsold. Media firms can also tilt the balance by discovering more about their customers than can be gleaned through auctions. The obvious way to do this is to force people to register for websites, or even to pay (which reveals their credit-card details and where they live). In short, content is no longer king online. Information about users is what really matters.

Regulators may yet stymie the growth of real-time bidding. Targeted advertising is drawing anxious scrutiny from congressmen and journalists. A Wall Street Journal investigation into online tracking last year found that its own website dropped 60 digital markers onto a visiting computer. Before May 25th European governments must incorporate a privacy directive that is expected to make it easier for users to opt out of targeted ads. A confusing patchwork of laws may result.

But few expect radical change. So quickly has targeted advertising advanced that a ban would severely disrupt the internet economy. Web users are more likely to see little icons identifying targeted ads. If the past is any guide, people will learn to ignore them, too.