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
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.
Increasing Targeted Ads
Surprisingly, some two-thirds of all queries on the Web now don't go through big search engines such as Google but rather through specific sites, says IDC's Feldman. Somebody looking for a book, for example, is more likely to go to a specific site like Amazon rather than Google, she explains. Sites with highly targeted audiences are thus valuable to advertisers, but "the number of queries that are monetized is far less then it could be because not everybody has Google Adsense," says Feldman. "Any company that can deliver better, more targeted leads is going to be able to command a higher price because the pay-per-click is going to be higher."
Proximic hopes to deliver just that. "There are 200,000 vertical interest groups on the Internet, and that number is growing, but publishers don't have adequate access to revenues in those specific environments," says Pieper, the company's chief executive. "That's why there is a need to increase the number of targeted ads."
The biggest concern for the startup is that so far it has only signed up a few publishers to carry these targeted ads. They include British newspaper The Independent (which is coincidentally a BusinessWeek.com content partner) and New York's Nature Publishing Group. But if Proximic can scale up as promised, it will be possible to begin matching targeted ads to niche user groups and blogs, says Pieper.
Another advantage over Google, Pieper adds: Proximic is able to deliver targeted ads without impinging on anyone's privacy. The company's technology doesn't use behavioral targeting or historical data, practices that are coming under growing fire from concerned consumers. Proximic's matches are based only on the content of a particular page.
Co-founder Nitsche is a math whiz who has specialized in sophisticated algorithms and pattern-matching technology. In 1984 he won the world microcomputer chess championship by designing a chess program that operated on a computer with only five kilobytes of memory—smaller than most e-mail messages today. After two decades of research, Nitsche is using the same kind of pattern-matching technology to link digital buyers and sellers on the Net. The depth of Nitsche's work helped him snag $8.87 million in funding from Munich venture capital firm Wellington Partners and the venture unit of German media giant Holtzbrinck Group.
A Young, Volatile Market
By winning over large catalog-owners as customers, Proximic avoids having to make thousands of deals with individual merchants. Instead, the company will index these large sites and then serve up matching products as text ads along with relevant content links. Revenues generated from the ads will be shared among the catalog owners, content publishers, and Proximic.
Still, even if Proximic can demonstrate better matches, no one predicts it will be easy to take on Google. But like other contenders, Proximic has everything to gain. The digital advertising market "is still young, volatile, and prone to disruptions," says IDC's Wiede. "It took only five years for Google to get into the position it's in now; there is no reason why five years from now somebody else could not do the same."