Product
Background
AudienceNet
is Engage Technologies' (Nasdaq: ENGA) first significant application of their
core personalization technology. Developing this technology has been the focus
of the company ever since its founding by David Wetherell, CEO of CMGI (Nasdaq:
CMGI) and Engage's CTO Daniel J. Jaye. Their purpose was to apply what they
knew about direct marketing to the Internet. In the process they developed data
mining technology which was sold to RedBrick (now Informix) in 1997, although
Engage retained the rights to use the technology.
AudienceNet
is a product aimed at advertisers and advertising agencies. Advertisers would
like their ads presented to people who are likely to respond to them. Response
is measured primarily by the clickthrough rate - the ratio of the number
of people who click on an ad to the number of people who see it. Clickthrough
rates very depending on the type of site and the types of ads, but a recent
Nielson/NetRatings report of major sites gave an average clickthrough rate of
0.51 percent. Sites with specialized content may see clickthrough rates around
two percent. Advertisers would like to present their ads to people who are more
likely than average to click through to get more information, and will pay for
higher clickthrough rates. For example, as reported by InternetWeek in December
1998, Infoseek raised its clickthrough rate from 1.5 percent to 10 percent by
using information about visitor history. Advertisers using this service were
willing to pay three times the usual advertising rate.
AudienceNet
offers exactly that kind of targeted ad serving. It has built up detailed profiles
of 35 million web surfers. The profiles were built up through data collected
from an initial base of four hundred sites. Since the data are based on user
behavior and are stored in cookies, they are do not actually identify users.
However, they can be the basis of ad serving to these users. Some studies have
already shown that a person who has clicked through on a particular advertiser's
ad once is more likely to do so again. The equivalent effect for ads on different
sites that share a common interest may not yet be verified by academic studies,
but is a natural hypothesis.
If
a website chooses to participate in AudienceNet, then the machines of any of
its visitors can be interrogated by Engage to see if they contain the AudienceNet
cookie. If so, their profiles can be looked up based on the identification stored
in the cookie. Each site participating in the network has a cache containing
the user identification numbers and some other data. The site (or its ad network)
uses this file to decide whether to serve its own ad (for those that do this)
or to redirect to AudienceNet for an ad. This is at the discretion of the site,
which in most cases will make the decision based on deriving the most revenue
or meeting its local impression contracts.
A
user profile is based on more than 800 interest categories, as well as demographics
and geographics. For example, there is a Sports category. Sports has subcategories
for various classes of sports, for individual sports, and for other factors
that, for example, distinguish participants from spectators. Any member of the
network can add additional categories to the mix; so, if a site wanted to serve
ads to people based on their favorite ice cream flavors, it could do so. Once
these ice cream flavor categories have been added to the profile, other sites
could also use them.
The
process of choosing an ad uses a proprietary algorithm that takes into account
recency of each data point, the frequency with which the user has shown interest
in the variety of categories, and the duration of the users' relevant web page
visits. Some of these data are mined from web logs of the participating websites,
although sharing of logs with Engage is not a requirement of belonging to the
network. While the total package of categories and other information allows
sites a great deal of discrimination in serving ads, Engage expects that many
will rely on predefined clusters of characteristics; these are general demographic
groupings like Active and Athletic Adults, Affluent Individuals, Business Professionals,
College Students, and Heads of Households.
Engage
hired an independent advertising research company to evaluate the effectiveness
of using profiles for serving ads. In this study profiling was compared with
not profiling. Overall, it was found that serving ads to prequalified surfers
can raise the clickthrough rate by 28%.
Security
is an important concern for AudienceNet. Engage claims that a good deal of effort
is taken to make sure that individuals cannot be identified by their profiles.
As part of this effort, the company has a "Knowledge Ontology Review Board"
that studies the effect of adding new categories; ontology is a branch
of metaphysics dealing with the nature of reality.
AudienceNet
can be marketed to anyone who serves ads. An advertising agency or an ad network
could use it to improve the clickthrough rate for their advertisers. Or, an
individual site that does its own ad serving can use it to enhance the response
rates for its advertisers.
The
market for Internet advertising services has been shaping up as a conflict between
Engage's parent company, CMGI, and its archrival DoubleClick (See TEC Technology
Research Note: "'Ads
are us', boasts CMGI" October 7th, 1999). A distantly related DoubleClick
product, DoubleClick Dart, was released a year ago and other targeting products
will certainly follow. With ad sales continually rising (See TEC News Analysis
article: "Advertising
Revenues Grow and Grow but Slower and Slower" October 6th, 1999 )
there will be more and different products introduced for delivering targeted
users to advertisers.
The
potential power of AudienceNet for delivering targeted product content to users
may outweigh its strength in the advertising arena. Where Amazon can now deliver
to its return visitors a list of recommendations based on their previous purchases,
Engage will be able to do this across otherwise unrelated sites in its network.
So, a person who searches for information on Ireland in CMGI's AltaVista engine
might see ads for vacations to Ireland at a travel site, a "special" on Irish
linen at a home shopping site, and information about soda breads or scones at
a bakery site.
A
site using AudienceNet is not restricted to advertising. The same profile data
could be issue for targeting page content to a user. So, different users coming
to the home page of a site would see content tailored to their interests as
deduced by AudienceNet.
AudienceNet
is sold to advertising agencies and advertisers on a CPM (cost per thousand
impressions) basis. The rates range from $30 to $75 depending on the target
audience. To deliver these ads, Engage purchases inventory (impressions) from
websites and advertising networks, also at CPM rates. Some of Engage's largest
partners are websites and advertising networks that are also owned by parent
CMGI.
Joining
AudienceNet as a website is not difficult, but does take time. The company estimates
that this will normally be a six-week process. The website pages have to be
mapped to specific interest areas, which involves analysis by Engage's ontologists,
and then the ad tags (See TEC Technology Research Note:"How
to Serve an Ad: Better to Buy Than to Build" October 23rd, 1999) on
each page must be modified. AudienceNet launched on October 10, but as of the
end of November had not yet "launched" any sites beyond the original 400. The
company explains that the first launch involves enabling all of the websites
belonging to CMGI's AdSmart and AdForce networks, and this combined launch was
always understood to require more elapsed time than would a single website.
Product
Strategy and Trajectory
AudienceNet
is Engage's first application of its targeting technology. The second will be
in E-commerce space, although the company is not releasing details at this time.
However, it is a sure thing that the same database will be used, and added to,
for that and future applications. This will yield what Engage calls "convergence."
AudienceNet
is primarily a business-to-consumer product, and Engage has limited plans to
develop vertical markets. The company has been flirting with a specialized version
of the product called AutoKnowledge, which would be completely focused on automotive
sites, with the end goal of catching surfers during the window of time that
they are planning to buy a car. They have begin to work with AutoSite to explore
the concept further, and are wooing major car manufacturers.
While
vertical markets are generally seen as excellent business opportunities, Engage
can largely reap the benefits of vertical marketing without doing much work.
If a site that has the potential of anchoring a vertical business joins AudienceNet
and adds to the profile database characteristics specific to that vertical market,
it will be an easy sale for Engage to attract other companies in the same market.
Vertical markets can thus grow without any planning on Engage's part, purely
because other ventures see opportunities to target those niches. Both Adam Smith
and Charles Darwin would be very pleased.
Another
recent announcement by Engage gives additional clues to the strategy for AudienceNet.
Engage owns a piece of a startup called InsightExpress, which will provide customized
market research to small and mid-sized sites. The company will start with the
ability to collect data on about 25 demographic groups, but will easily be able
to provide much narrower (and more valuable) targeting once it integrates with
AudienceNet.
AudienceNet
itself is expected to grow to about 1000 sites by the end of the year 2000.
We estimate that the sites in this network will be serving 25 billion ad impressions
each month by that time. While there are no estimates for the percentage of
impressions that will be served through AudienceNet, a simple calculation is
instructive. If 1 percent of those 25 billion ads go through AudienceNet at
an average CMP of $50 (i.e., five cents per impression) Engage would gross $12.5
million per month. Since a large percentage of their inventory payments would
go back to other CMGI companies, and since their largest website is CMGI's AltaVista,
the net result would be that Engage does very well, and CMGI, in technical terms,
makes out like a bandit.
Product
Strengths
This is a product with promise. We believe that the future of Internet advertising
and E-commerce is in targeting. Engage has a very sophisticated and powerful
product with applications far beyond advertising. It is a particularly strong
product because it plays with any other product. Even users of competitive ad
servers can take advantage of AudienceNet. This puts considerable pressure on
DoubleClick and its new subsidiary NetGravity to develop a competitive product.
Product
Challenges
With no sites beyond the initial 400 used to develop the product having been
launched, there is as yet no user experience to draw on. We do believe that
the effort of changing ad tags will be a deterrent to some sites. We also project
that beyond general consumer sites, the effort of doing page analysis and working
new categories through the Knowledge Ontology Review Board will be a diversion
that many websites with targeted audiences outside of AudienceNet's established
characteristics will be slow to undertake. To be fair, handling sites of that
nature is not within Engage's strategy for AudienceNet at present, but as the
product's share of the consumer sites reaches its maximum penetration in, we
estimate, two to three years, these barriers will be more important.
Vendor
Recommendations
Engage
must pay attention to the speed of ad serving. A site using AudienceNet can
expect to see increases in the time to serve an ad. In theory, with no bandwidth
limitations either on the Internet or at the various servers involved, any slowdowns
would be negligible. But the Internet itself is beginning to move a little slower
(See Tec News Analysis article: "Is
There a Magic Pill for Web Performance Problems?" October 15th, 1999),
using AudienceNet takes more processing on a site's own servers than not using
it, and Engage's own servers are likely to see heavy usage as AudienceNet becomes
popular. Speed of service and uptime are crucial for websites, and Engage must
stay ahead of the growth curve.
We
believe that extending its database to better serve narrow markets will be key
for this product by the end of 2000. The current work on AutoKnowledge indicates
that the company is already working in that direction.
We
believe that there is a real question as to what Engage should do with its AdManager,
purchased from Accipiter over a year ago. The product is not highly thought
of, and to the extent that Engage pays attention to it as a product at all,
would be better dropped, sold or spun off. Engage has a good chance to take
and maintain a commanding position in targeted advertising and to parlay that
into a similar position in e-commerce. We believe that playing around with a
second rate ad server is an unnecessary diversion.
User
Recommendations
For
a website interested in increasing its advertising revenues AudienceNet is definitely
a product to explore. Users working with an ad network should enquire whether
the network is planning to enable AudienceNet. Users should negotiate specific
level of service clauses into any agreement; such clauses specify average and
maximum turnaround times for serving ads and the required uptime for the AudienceNet
ad servers. Naturally, methods of measuring these need to be determined as well.
We also recommend that a clear method for measuring ROI be determined, so that
the site can evaluate the value of AudienceNet. In order to do this, the site
must determine how it will track the uses of AudienceNet; this may require access
of some form to Engage's records, which the company seems anxious to assist
with.