The Promise of Online Display Ads

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Tailor-Made Ads

A pumped-up price is only part of the reason Yahoo has made 32-year-old Walrath and his team of 20-something executives multimillionaires. Yahoo is able to gather information on the surfing habits of users who flock to its sites and search tools. Right Media helps Yahoo use that data to better deliver tailored ads across the Web. So, for example, if a Yahoo Finance user visited a page on News Corp.'s (NWS) MySpace, Yahoo could buy space on that page, on the fly, to serve a higher-priced investment ad. Arguably, DoubleClick's ad exchange has similar appeal for Google.

The ability to serve ads across the Web to specific audiences is particularly important for advertisers looking to increase brand awareness, says Dave Morgan, chairman of TACODA, an ad network that specializes in serving such targeted brand ads across the Web. "Advertisers want television[-type] reach numbers," says Morgan.

Indeed, it is television and print ad dollars that the portals are trying to bring online with their networks. Even if just 2% of the $70 billion in television advertising goes to the Web's audience, that's a lot of growth, points out Hallerman. As those dollars migrate to the Web, the mix of search and display ads could become more even.

The Big If

Of course, for exchanges to fulfill their promise, publishers will have to continue to auction off ad space—even when they are owned by a competitor. That's a big if. "I think other publishers will get concerned," says Bill Gossman, president and CEO of Revenue Science, an ad-targeting network that buys space on Right Media. "Am I willing to mix my inventory with the dominant display advertising player on the Internet?"

Yahoo and Right Media stressed that the exchange would be kept open, akin to the NASDAQ. Yahoo would not, say, get any special knowledge of the bidding prices that it could use to outbid competitors at the last minute. Nor would it overwhelm the ad exchange with its own inventory at the expense of other publishers, said Yahoo's Decker. "We believe this capitalistic approach will yield the greatest experience for publishers," she said.

Scaring away publishers would only decrease the worth of Right Media to Yahoo. Yahoo expects Right Media to bring in $70 million this year from the roughly 7% fee it charges on approximately 6 billion daily transactions. Those revenues alone did not justify the $725 million purchase. Relationships with publishers such as Fox Interactive Network, which includes MySpace, were undoubtedly a consideration.

Without Right Media, Yahoo couldn't fully capitalize on its substantial knowledge of users' Internet habits. And Walrath's initial, less promising depiction of display advertising wouldn't look so wrong after all.

Holahan is a writer for BusinessWeek.com in New York.