Google Introduces a Smarter Ad Network

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following three consecutive days of losses, stocks are rising this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.05% and 0.08%, respectively, at 10:12 a.m. EST.

If you've been handicapping the odds of a December "taper" in the Federal Reserve's bond purchase program at next week's Federal Open Market Committee meeting, note that inflation came in at negative 0.1% in November, just below the 0% median forecast in a Bloomberg economists' poll. Excluding food and fuel, core inflation rose 0.1%; that's well below the Fed's 2% inflation target, so it won't encourage central bankers to initiate an early taper.

To paraphrase a philosophical thought experiment: If an ad is on a Web page and nobody sees it, is it really an ad? Online advertising pioneer Google (NASDAQ: GOOGL  ) wants to move past that question in order to make the medium more effective -- and to capture better pricing. As the Financial Times reported, "Google on Thursday became the first major online ad network to charge clients only if their adverts have been seen, in a radical shake-up of pricing that affects more than 2m sites in its display advertising network."

It stands to reason that marketers would only want to pay for an ad that people actually see (some ads may be buried at the bottom of a Web page that users may not scroll down to), but the trick is being able to determine whether that has occurred. In order to do this, Google has developed the technology to measure whether an ad is visible on the screen and what proportion of the ad is visible. The advertisement is considered "viewable" if at least half of it is visible on the screen for one second or longer. Naturally, this does not guarantee that the ad registered with the user, but it's certainly an improvement over paying for ads that never even show up on the screen.

This development will ultimately have two countervailing effects on ad revenue. On the one hand, the number of viewable ads that marketers pay for will fall; on the other hand, as the supply of ads is constrained, ad rates ought to increase. It's unclear what the aggregate effect on revenue will be (Google won't disclose the percentage of ads on its networks that are not viewable); however, it represents progress that adds value and credibility to Google's product. Still, pay-per-view is not as powerful as another Google pricing model, pay-per-click, which requires an action on the part of the consumer.

Online advertising models and technology are becoming increasingly sophisticated in their pursuit of relevance and, ultimately, return on investment. Google has been at the vanguard of this trend, but it is not alone. Last week, for example, Twitter (NYSE: TWTR  ) introduced targeted ads that are tailored to users according to their browsing history.

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