Several years ago, it seemed fanciful that simple text ads could be the next big thing. Now we know better. Those unassuming ads have turned Google (NASDAQ:GOOG) into a media powerhouse, and encouraged companies such as Yahoo! (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) to try to take a bigger chunk of the market.

Despite the ramped-up competition, Google continues to increase its overall lead in the search business. That may be partly because it's so adroit at adapting to its competitive environment. Even though it leads the way in text ads, it's already realizing that it needs to move beyond just text. The company has announced a new video advertising system, with the first visual ads scheduled to roll out on partner sites that use Google's AdSense program.

Here's how it works. Let's say I'm in the real estate business and have several listings. I create videos for each listing and turn them into ads, then upload them into my Google account. Suppose, then, that a local real estate site uses Google ads to generate revenues. If a user clicks my ad -- and watches it -- I will pay a fee, which is based on a bidding system. The fee is split between the real estate site and Google.

Since a user must click an ad to view it -- a process that Google calls "click to play" -- Google avoids the annoyance of forcing people to see anything. The advertiser, meanwhile, pays for performance. That same formula has worked quite well for Google's text ads. Advertisers can also take heart that in knowing that producing a video does not have to be a difficult or costly process, as successful sites such as YouTube have proved. These days, you can even use a typical cell phone to make a video.

Greg Sterling of Sterling Market Intelligence, a research firm for online advertising, says that Google's video ads "won't have an immediate effect on traditional media." However, he added, "over time, the development of more online video ad options will potentially lure TV dollars away." And Google definitely wants a big piece of the TV ad market -- the biggest ad market around. It's getting there with a ground-up approach, using sophisticated technology to streamline the process so that any organization -- from a one-man shop to a Fortune 500 company -- can easily place ads and test them.

While Google has so far lagged with online video, the company has now introduced a very innovative approach. The road will be rocky, but with Google's enormous Web platform and its experience in scaling ads, it could very well find ways to take away share from existing media outlets and even create new markets. Ultimately, this becomes just one more example of Google innovating to heighten the stakes in the advertising war.

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Microsoft is a Motley Fool Inside Value pick.

Fool contributor Tom Taulli does not own shares of companies mentioned in this article.