AOL Buys Ad Firm to Trail Consumers Online

Time Warner's AOL has reached a deal to buy Tacoda, an online advertising firm that specializes in behaviorally targeted marketing .

AOL will integrate Tacoda into its Advertising.com division, where the six-year-old firm's behavioral science marketing will be used to help AOL produce more targeted and effective online ads.

The buy signals that AOL wants to compete more vigorously with Google (Nasdaq: GOOG), Yahoo (Nasdaq: YHOO) and others to provide third-party ad-serving services that go well beyond AOL-branded sites, which were transformed from a paid-access Internet service to a free-to-all portal two years ago.

A Wider Reach

With the acquisition, AOL will be in a position to "better serve advertisers by enhancing our ability to precisely target advertisements across an even broader network," said AOL President and Chief Operating Officer Ron Grant.

"We are committed to bringing advertisers and publishers a full range of tools and services, along with the widest reach," he added.

Terms of the deal were not disclosed; however, some published reports said AOL would pay around US$275 million for the firm. Whatever the price, the Tacoda purchase is not likely to rank among the major interactive marketing deals of the year, which has seen Google buy DoubleClick (Nasdaq: DCLK) for $3.1 billion and Microsoft (Nasdaq: MSFT) scoop up aQuantive in what will be close to a $6 billion transaction.

The Right Time?

Still, the transaction is significant because the behavioral targeting technology of Tacoda represents AOL's embrace of a rapidly emerging field that attempts to combine human behavioral study with digital technology.

Tacoda's technology can help brand advertisers better target messages to specific audience segments by analyzing the types of Web sites they visit before landing on an ad.

The behavioral targeting market is seen exploding in coming years, with eMarketer saying the segment will generate about $350 million in revenue this year and grow to be worth as much as $3.8 billion by 2011.

Such targeting raises privacy concerns, eMarketer Senior Analyst David Hallerman told the E-Commerce Times, noting that advertisers who will successfully employ the techniques will be those who give consumers the ability to opt out and clearly explain the benefits to users who allow their information to be stored and online activities tracked.

"All ad targeting depends heavily on user data," Hallerman said, but "behavioral targeting in particular depends on a plethora of information about where users surf, how long they stay there, what they click on and the keywords they use to search."

The segment offers at least the promise of enabling marketers to predict consumer behavior, and the ability to target consumers based on behavioral patterns will be a major reason why more marketing dollars currently being spent in traditional media will find their way online in coming years.

Selling Remnants

AOL has been active in purchasing firms in the interactive marketing space. Already this year, it bought Third Screen Media, a mobile ad concern, and streaming video firm Lightningcast as well as Germany's Adtech.

In the future, the Tacoda purchase may mirror AOL's 2004 purchase of Advertising.com, Roy Shkedi, founder and CEO of behavioral targeting firm AlmondNet, told the E-Commerce Times.

"The same way they recognized that the ad network segment was about to take off on a very large scale and went off and snuck in the Advertising.com buy before networks became the hottest thing around, this is a segment that is just now starting to take off," he said. "Basically they just repeated the same strategy , and I think we may be looking back on this in a few years as a major strategic move."

Several factors are driving the behavioral targeting segment, Shkedi said, including demand from advertisers to better target consumers through the Web, the fact that only recently has the amount of data on Web users been large enough to effectively predict behavior and the need for online networks to sell so-called remnant inventory. Such inventory includes general news pages and other sites where contextual advertising is difficult to place and is where most users spend the majority of their online time, he noted.

In fact, even though 40 percent of online ad spending goes into search, users spend less than 5 percent of their time at search engines. "The next growth engine of online advertising is monetization of that all that low-value ad space," he added. That space can better be monetized with behavioral marketing because ads can be matched to the user's past behavior -- his or her past searches, their click-through tendencies and other data.

AOL will be able to navigate around any privacy concerns, Shkedi commented, adding that Tacoda and AlmondNet both comply with industry standards assuring that all data collected remains anonymous.