New wave of Web ads on the way

Internet marketers are promising a new generation of online advertising "lite" that's more effective and less annoying than some current methods, but they could have a hard time convincing jaded Web surfers they're for real.

Highlighting the trend, 180solutions this week will begin promoting a downloadable program that purports to offer a gentler twist on "adware," providing users access to free music downloads and other content in exchange for the right to flash a limited number of ads onto their computer screens.

180solutions is treading on dangerous ground, given the growing consumer resistance to adware products and past criticism of its own n-Case product. But it has attracted a big backing, having recently scored $40 million in funding from Spectrum Equity Investors, a Menlo Park, Calif.-based venture capital firm.

Another upstart, United Kingdom-based Vibrant Media, is making headway with a system that delivers ads through links attached to keywords in the text of news stories and other articles published on the Web. The system will debut in the United States next week, when Vibrant is expected to announce a high-profile partnership with search heavyweight Overture Services.

The announcements come amid a rebound in the online ad industry, which saw Web ad sales surge 38 percent in the fourth quarter to $2.2 billion from the comparable period a year earlier, following years of declines. Analysts expect the market to rise by 10 percent or more for the full year in 2004, registering more than $8 billion in sales.

"Where there's money, there's innovation, and these new firms will be presenting interesting new ways for advertisers to spend their hard cash," said Charlene Li, principal analyst at Forrester Research.

Marketers have long heralded the Internet as a sea change for the advertising industry, promising new techniques for delivering only those sales pitches that readers actually want to see. The reality has fallen far short, however, as advertisers shied away from the medium, and initial efforts from pioneers such as DoubleClick ran into privacy complaints.

The industry has responded with new methods, scoring a runaway success with search engine marketing that uses query terms to serve up targeted ads to Web surfers. But other formats, such as pop-up ads and adware, have faced a considerable backlash.

Vibrant and 180solutions signal the emergence of a new wave of online advertising at a time when Web surfers are finally accustomed to--and armed with the tools to block--the old ones.

Internet operators are eager to get a slice of the estimated $4 billion paid search market this year by adopting new contextual ad technology from the likes of Vibrant. Desktop applications are also taking off with new vigor, offering Web surfers a bargain of free software in exchange for their attention.

"Venture capital is back, and they are very much interested in ad technology, because it's a field that's heating up," said Denise Garcia, an advertising analyst at research firm GartnerG2. Online advertising "is growing faster than radio, print or TV."

What's old is new
Founded in June 1999, Bellevue, Wash.-based 180solutions develops advertising software. Its product, Zango, is a downloadable application that sits on the PC desktop and offers customers selected free content. In the background, it monitors Web surfing behavior and uses that data to deliver ads when customers are shopping or using a search engine.

For example, type "hotels" into the search box at Yahoo or Google, and Zango's search assistant will automatically serve up the home page of Expedia in another browser window, a recent test of the software showed. The term "casinos" called up the home page of 888.com, which prompts the visitor to download gambling software. Visiting the jewelry site Ice.com delivers a window for another shopping site.

The formula is well worn by companies like Claria, formerly known as Gator, and WhenU. Claria offers SearchScout, which delivers pop-up ads with paid search results when its customers use Google, for example.

Yet 180solutions is different in several ways. First, it delivers ads that are simply the home page of the advertiser, instead of an advertisement with a link to the company home page. Taking a page from search advertising, it auctions keywords to marketers, typically charging between a penny and $1 for the "visit."

Second, 180solutions plans to make partners of Web publishers, which often hate ads obstructing their content. Publishing partners get fees for each person who downloads Zango.

The benefit to users, 180solutions CEO Keith Smith says, is access to ad-free content. "We introduced a concept called time shifting with the idea of letting readers get access to content unencumbered by banners and pop-ups," Smith said. "Instead, they would install our software, and then, when they are shopping or looking for something online, they would get ads that are relevant and timely."

He added that users will only see two to three ads a day.

Zango has so far signed on Caption City, a humor Web site, and the rapper Sir Mix-A-Lot to feature premium music selections for Zango.

"I love the Internet, but I hate what it's becoming--you know, an intrusive...slithery place of smut and pop-ups," said Sir Mix-A-Lot. "In designing my Web site, I have no advertisers, no banners, no pop-ups. The problem became keeping my content fresh without costing a lot of dough."

"Zango's all about keeping the Internet free," he added.

Complaints and challenges
But 180solutions is entering a thorny market. Some adware programs have been criticized for lax disclosure policies, leading to complaints from users that they installed the program without knowing it.

The company has faced such complaints over n-Case, billed by the company as an advertising software tool.

According to security site PestPatrol, n-Case is "an ActiveX drive-by installer," meaning that it can automatically install itself onto desktops through various ads at Web sites. The program then adds new files and serves pop-up ads, according to the site. It also poses a risk to privacy, with the ability to send a unique identifier from the PC to its home servers that could include data on Web usage, e-mail and other personally identifiable information.

n-Case has been installed on 30 million PCs, 180solutions' Smith said, and the company plans to "upgrade" those applications in the coming year. He denied that n-Case is so-called spyware.

"We don't collect personally identifiable information....and the user has to give consent," he said.

Smith added that with n-Case, it was more difficult to inform users about the software, because it was bundled with third-party applications. "It's easier to inform people when they're downloading it from content partners," he said.

180solutions could also face legal uncertainties over Zango, given its ability to deliver ads while customers are visiting third-party Web sites.

Similar applications from Claria and WhenU have established unfavorable legal precedents in the arena.

Last week, a European court issued a preliminary injunction against Claria that prohibits the company's pop-up and pop-under ads from appearing over the German rental car Web site of Hertz, without the agency's permission. Similarly, WhenU was hit with a preliminary injunction last December in a case filed by 1-800-Contacts. The judge ruled that WhenU violated 1-800's trademarks by displaying ads atop its Web site.

Yet at least one judge has ruled in favor of WhenU. In November, a federal court judge in Michigan denied Wells Fargo's motion for preliminary injunction to block WhenU's pop-ups, noting that those users who received the ads had consented to have the adware installed on their computer, in exchange for free software from WhenU.

Even if 180solutions gets past the legal issues, it still must woo reluctant advertisers. Jupiter Research analyst Gary Stein said as many as one-third of advertisers have philosophical grievances against adware, and about 8 percent of companies actually have corporate mandates not to advertise with adware companies.

Is it a hyperlink? Or is it an ad?
An emerging company is also set to make Web editorial content more ad-friendly by taking its boundaries away.

Vibrant Media develops a service called IntelliTxt that links editorial "keywords" to promotions. Taking advantage of the ubiquity of hyperlinks in news stories, it highlights and underlines selected words within copy to signify that it's pegged to an ad. When readers send their cursor over the word, a box appears with a promotional message. Clicking on the word will take readers to the advertisers' Web site.

In one example, a story on BetaNews (an IntelliTxt customer) about Microsoft's game strategy links the words "Internet access" to an ad for AOL's 9.0 Optimized premium Web access package. Microsoft's own name in the opening paragraph features an ad for a tablet PC.

Other companies have tried similar offerings without publishers' sign-off--and without success. In 2001, Microsoft developed technology called Smart Tags, which linked keywords to Web pages of Microsoft's choice. The software giant had plans to include the tags in the browser bundled with the release of Windows XP but reversed course, after facing a flood of criticism.

Similarly, a company called eZula has drawn complaints from publishers, because its text ads appear on top of their content without their permission.

Vibrant is attempting to avert those foils by giving publishers reign over it.

The company has been in stealth mode for more than a year and is now making some noise, having signed up other publishing customers, including Hearst and The Motley Fool, as well as opening a U.S. operation. Search heavyweight Overture has also quietly partnered with Vibrant to extend pitches of its more than 100,000 advertisers to the program.

The technology is complementary to Overture's, because it relies on syncing keyword ads to the context of a Web page, or what's called contextual advertising. It scours pages to discern their meaning and deliver related ads. What's different is that the contextual ad networks of Overture and Google relegate text ads to the margins of Web pages, whereas Vibrant's customers buy in to feature ads in the content.

"We're fulfilling the promise of contextual advertising--it has been in the back of the class, where banner blindness exists," said Doug Stevenson, who founded the company in 2000. "This delivers higher response rates for advertisers by their being linked to content in a relevant way."

Vibrant has $2 million from angel investors and Fortis Bank in the United Kingdom. It plans to make $25 million in revenue this year, and has been profitable for the last year and a half, according to Stevenson, who was previously the head of ecommerce at America Online.

Still, analysts say response rates for contextual ads pale in comparison to sponsored search. What's more, people may be confused by the nature of hyperlinked ads.

"Isn't that a little misleading? The Internet is all about links to other information--people could feel like they're being deceived a bit," said GartnerG2's Garcia.

CNET News.com's Evan Hansen contributed to this report.