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The week is already off to an interesting start for the online advertising industry.

According to a report issued Monday by the Interactive Advertising Bureau and PricewaterhouseCoopers, internet advertising revenues hit an estimated $21.1bn in the United States last year.

And according to a study published by research firm The Kelsey Group, global internet advertising revenues in 2007 were $45bn. Both represent notable increases from 2006 figures.

Evidence that the internet advertising business continues to grow at a healthy pace is especially interesting given that there have also been two important pieces of news affecting two of the largest players in the industry - Google and Microsoft.

Research issued by comScore on Tuesday showing that "clicks on Google ads in the United States were flat in January when compared with a year earlier" spooked investors and sent Google's stock down more than 4% by market close.

According to Bear Stearns analyst Bob Peck:

"comScore reported 532mn domestic paid clicks in Jan. 08, flat YoY, but down 12% sequentially (Jan. 08 vs. Oct. Oct. 07). The click through rate was the lowest since comScore started reporting this data and was down 200bp from levels in 4Q and down 400bps from levels in 1Q of last year."

If the comScore numbers are accurate, they seem to indicate that Google may not be immune from recession as some of its more confident (or arrogant?) executives seem to have believed.

As noted by the New York Times, Google has lost $83bn from its peak market capitalisation. Thus, the "wisdom of the crowd" and reality are not favouring the "Google is immune from recession" theory at the current time.

Of course, I've always believed that Google's business was far too dependent on a single revenue steam and that the CPC model driving it is far from perfect.

While I'm not yet ready to make any judgments about the real causes behind the apparent drop in paid clicks, I'm also not impressed with some of the explanations provided by Google proponents, including the idea that it has simply improved click quality.

It will be interesting to see how this plays out and whether Google's next earnings reports reflect the significant problems such a drop in paid clicks would likely bring.

One thing is clear, however - Google, and CPC, have vulnerabilities.

The timing of Google's woes couldn't have been better for Microsoft, which is, in addition to continuing its attempt to buy Yahoo, also looking to take online advertising beyond "clicks."

Did Microsoft know something we didn't or did it just get lucky?

On Monday, the company made an announcement about a new internet advertising offering. Per the press release:

"Microsoft Corp. today announced Engagement Mapping, a new approach to managing and measuring the effectiveness of online campaigns that goes beyond the current 'last ad clicked' standard.

"For the last decade, virtually all ad campaign reporting methodologies associate sales, leads and Web traffic simply to the last click or ad exposure. Engagement Mapping takes into account for the first time all the various online touchpoints and interactions a consumer experiences before an eventual sale."

According to Microsoft's senior vice president of Advertiser & Publisher Solutions, Brian McAndrews:

"The ‘last ad clicked’ is an outdated and flawed approach because it essentially ignores all prior interactions the consumer has with a marketer’s message.

"Our Engagement Mapping approach conveys how each ad exposure — whether display, rich media or search, seen multiple times on multiple sites and across many channels — influenced an eventual purchase.

"We believe it represents a quantum leap for advertisers and publishers who are seeking to maximise their online spends."

While I think the assumptions behind Microsoft's Engagement Mapping approach are valid, the proof is always in the pudding and Microsoft's press release was short on pudding.

Nonetheless, I do believe that there is substantial room to innovate beyond the familiar internet advertising methods. Given the increasing talk of "engagement" among marketers, Microsoft could do far worse than trying to develop new innovative internet advertising offerings, instead of trying to compete head-to-head with a dominant Google that is relying on a model (CPC) that could conceivably be less prominent in the future than it is today.

As the internet advertising industry grows and is exposed to new technologies, new advertiser demands and changing economic situations, it's clear that a significant amount of evolution is going to take place.

As signs of this evolution become evident, I consider that we might be faced with an ironic scenario - a Microsoft that is often criticised for lacking innovative prowess develops new, innovative internet advertising offerings in its attempts to defeat Google.

Meanwhile, Google, which seems hell-bent on becoming the new Microsoft, becomes distracted by all of its other non-core business activities and fails to innovate in the area that currently brings home the bacon - internet advertising.

Stranger things have happened and I'm pretty sure that hell has gone through a few Ice Ages in the past.

Drama 2.0

Published 27 February, 2008 by Drama 2.0

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