Proximic: Ad Tactics to Challenge Google

Using pattern-matching technology to deliver online ads, this German startup is taking on the giant. It's already got deals with Yahoo! and eBay

by Jennifer L. Schenker

There could hardly be a more quixotic business plan for a startup than to tackle Google (GOOG), the colossus of Internet search and online advertising. Hopeful rivals have struggled in vain for years to steal some of its market share. Even giant competitors such as Yahoo! (YHOO) and Microsoft (MSFT) continue to lose ground to the King of Search.

Still, the long odds don't discourage ambitious entrepreneurs convinced they have a better mousetrap. The latest startup to grab attention is Munich-based Proximic, founded in 2001 by Thomas Nitsche, a German mathematician and his business partner, Philipp Pieper, an Internet entrepreneur. On Jan. 16, Proximic announced a breakthrough deal to supply its search technology to Yahoo! Shopping and eBay's (EBAY) Shopping.com.

Pinpointing the Geography of Advertising

Both of the e-commerce sites will harness Proximic's patent-pending pattern matching technology to deliver advertisements over the Net that Proximic says are better suited to the context in which they're placed than anything Google can equal today. If the deals pan out, Proximic could be rocketed from obscurity to an outsized role in greasing the wheels of online commerce.

The terms of the relationships are just emerging. Yahoo Shopping and Shopping.com both maintain enormous catalogs of items for sale that are difficult to find—on an individual basis—through conventional online search advertising. Thus, a Net surfer reading an article on weed-whackers might be shown a general ad delivered via Google's Adsense network for lawn-care products—but not an offer for a specific brand of trimmers available at a nearby garden store.

By entrusting their online catalogs to Proximic's indexing technology, Yahoo Shopping and Shopping.com will provide the German startup with an inventory of 50 million individual items, each of which could become a context-specific ad served up alongside online content. Proximic says by comparison, Google's Adsense has an inventory of about only a million ads, though others think the number is probably higher. (Google declines to reveal the number of ads it handles.)

Google Expected to Remain Dominant

Proximic says it can not only handle more ads but also do a better job than Google at matching online buyers and sellers. That's a big claim for a company with just 14 employees. After all, in the first three quarters of 2007, Adsense generated around $3.5 billion for its partners. And, unlike Proximic, it has built up relationships with hundreds of thousands of publishers over a period of years. Google also provides tools to advertisers that give them control over targeting and placement.

"Adsense has been very successful in placing relevant ads on publishing partner Web sites, and we are constantly improving the way in which advertisers can target their ads," says a Google spokesman. But, he notes, "Google recognizes that we operate in a highly competitive market."

But while Google is expected to remain in a position of dominance for the next four to five years, "the market is by no means played out," says Karsten Weide, a digital marketplace analyst with tech consultancy IDC. He estimates the global market for digital advertising will grow to $85 billion—or 10% of all advertising—by 2011, up from an estimated $70 billion this year. The pie could actually get much bigger, adds Sue Feldman, vice-president for content technologies at IDC.