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Despite having access to a treasure trove of data about people's hobbies, demographics, and friends, social networks can find it tough to sell banners ads for more than the price of a stick of gum.

So ad start-ups such as 33Across are trying to take advantage of profile data on social-network members to create the next generation of behavioral ad targeting. Or behavioral ads 2.0. (For a portrait of another start-up targeting the intersection of social networks and advertising, with an announcement due Monday, see "SocialMedia to unveil 'friendship ranks'.")

New York-based 33Across has developed an analytical engine that can look at behavior patterns of members of a social site in order to track who, in the so-called social graph of friends, is most influential to others. It examines things like how many messages a person sends or receives, how many people he or she has befriended, or whether that person tags photos, blogs, or forwards links to friends.

With that information, it can pinpoint who are so-called viral propagators, or the people most likely to "start a viral cascade" about a product or service, according to CEO and founder Eric Wheeler, a former ad executive from Ogilvy.

"We understand where a person sits among their friends and friends of friends...and the likelihood of how viral they would be," Wheeler said.

Meebo partnership
In recent weeks, 33Across signed its first major customer, Meebo, a social site that synthesizes multiple chat applications into a single browser interface.

Martin Green, Meebo's vice president of business, said the company is using 33Across to provide better analysis and research for advertising clients such as Universal Pictures. It is not using the 33Across self-service ad technology to target ads yet, though it is talking to 33Across about adding that functionality.

In a nod to potential privacy concerns, Green said Meebo is prepared to disclose its practices to members and give them a way to opt out.

Under the deal, Meebo gives 33Across information about its roughly 36 million monthly active users, excluding names, phone numbers, and addresses. With that data, Meebo and 33Across can see how a marketing promotion spreads throughout the members of its service by looking at which members are sending links to friends on the The Incredible Hulk, for example.

Meebo can study those users' demographics, how many "buddies" they have, whether they're influential among a group, and whether they typically shy away from sending links but are apparently inspired by a certain campaign.

"We're giving advertisers more information on how their ads are pervading the network," Green said. "We're looking at the nature of the people who shared that studio's trailer or content with friends. Are they (the) same 'connectors' in the network? Or did you appeal to people who don't normally act on promotions?"

Whereas most advertisers pay as low as five cents to reach a thousand viewers on an ad network, Meebo is charging a list price of $12.50 per thousand impressions using 33Across' technology, Green said.

Tracking social patterns
Technologists have long talked up the ability to track people's behavior across the Web, create individual profiles, and then better target ads for higher rates. And the trend took off with behavioral-ad start-ups like Revenue Science and Tacoda Systems, the latter of which has since been bought by AOL. Now, with the rise of social networks, a new crop of companies is trying to mine even more profile data about people by analyzing their social patterns.

33Across, which has raised more than $1 million from backers such as First Round Capital and former Tacoda CEO Dave Morgan, eventually plans to use data on people's relationships and influence in social networks to better target ads to them on mainstream sites.

33Across' Influence Map shows more influential people in warmer colors (red, orange, yellow) and less influential in darker colors (blue).

(Credit: 33Across)

Wheeler said 33Across cross-site tracking would work like behavioral ad targeting, in which partners of 33Across would place a tracking pixel on their page and that piece of technology would call its servers to place a cookie. The cookie would identify that person without linking his or her name, address, or phone number. That way, 33Across could target an ad to a person on a hypothetical partner site such as eBay, based on the behaviors at Meebo, for example.

Wheeler said today, people don't need to opt out of 33Across' site-wide ad program because it's not in operation yet. But the company plans to announce new partners in the coming weeks, and that could prompt the start of its cross-site tracking and ad delivery system. When that happens, he said, 33Across will give people the ability to opt out of the service at its Web site. (He did not say that program would be imminent, however.)

So how does all this friend and influencer targeting work? Much of it is based on machine-learning algorithms for social networks that have yet to be proven.

One issue with this technology is that it can be hard to track down who's most influential in a group. That person may be influential among friends, when it comes to autos, but he or she might not hold sway, when it comes to travel. Pinpointing expertise can be tough, and influential people might be the same for each category.

And then there are the privacy qualms.

"The issue with social networking and advertising is largely not a technical problem; it's a cultural one. When you're out there with your friends and interacting, people are somewhat resistant to ads. It's a different context, and people can get pissed off," said Jeffrey Davitz, program manager and director of the social-computing group in SRI International's Artificial Intelligence Center.

At SRI, Davitz has researched machine learning in social networks as part of a multimillion-dollar project funded by the Defense Advanced Research Projects Agency, or DARPA. Specifically, he developed an application that could automatically monitor people's interests and influence in military communities such as Company Command (for captains).

The idea was to identify influencers who care about specific topics, such as attacks involving improvised explosive devices in Iraq, and then ensure that they see relevant information in a news feed to that topic, such as an officer posting a document to the site pertaining to explosive devices.

That's what's called "smart push," he said. The technology is currently deployed on three military sites, but SRI is looking at commercial applications for it, not related to advertising.

"You clearly can learn more about people from MySpace and Facebook," said Davitz. "The question is whether or not people will accept that kind of advertising. People feel it's kind of creepy," he said.

Know how to win friends and influence people? Advertisers want you to peddle their stuff to peers on Facebook and MySpace.

Internet start-ups out to crack the problem of advertising on social networks are developing ad technology that can analyze which people are most influential to their friends on social networks so that they can target those people with pass-it-on messages about Apple's latest iPhone or The Incredible Hulk movie.

The upstarts are basically scouting for the social-media equivalent of a Typhoid Mary who can spread a message, with effectiveness, to friends on sites like MySpace or Facebook.

Two such start-ups, SocialMedia Networks and 33Across, are on track to deliver those influencer services with the goal of becoming the advertising players of the social-media age--that is, if they can carefully navigate privacy concerns. Though they have different business models, their technology is part of a lineage of online ad targeting.

"We're trying to make ads suck less in social networks," said Seth Goldstein, founder of San Francisco-based SocialMedia Networks. (Are SocialMedia and 33Across on a collision course? Read more about 33Across here).

On Monday, Goldstein is expected to announce "social banners," or display ads that turn you or your friends into the hook of a marketing message. In tandem, SocialMedia will announce that it's developed a patent-pending algorithm called FriendRank to power those social banners. It's like Google's PageRank, but instead of ranking pages for their popularity, it ranks friendships.

The company looks at how people interact with Facebook or MySpace applications--those 5,000 widgets in its advertising developer network--to determine who, among someone's 100 or so friends, are most important to them. It might infer relationships by seeing who you've played Scrabulous with or turned into a vampire. (The company said that it works within Facebook's terms of service so as not to collect and store someone's profile data.)

"FriendRank basically helps us choose which friends to put in the ad," Goldstein said in an interview. Beyond that, he wouldn't describe the secret sauce behind the technology.

For example, instead of a banner advertising The Incredible Hulk movie, a social banner would ask which of your close Facebook friends, among a short list, you'd like to invite to see the movie. Or a social banner might inform you that a friend Jim just ranked Iron Man with three stars, and it might ask to "click here to buy tickets at Fandango."

Understanding people's relationships
Of course, online advertising has taken many shapes over the years, and this is just the newest twist. Companies have targeted Web ads to people's demographics, geographies, and behaviors. They've also targeted ads--and it's met with the most success--to keywords typed into the search box or the content of a story page. Those ad models are still in practice, but now that social networks are taking up so much of people's time, a new breed of advertising is taking shape.

"The next step is to understand people's relationships," said Martin Green, vice president of business at social instant-chat site Meebo. Last week, Meebo signed an ad partnership with Mountain View, Calif.-based 33Across to monitor the effect of advertising promotions from Universal Pictures. 33Across is helping Meebo understand which types of people--mavens or influencers--respond to which ads.

Certainly, everyone from Google to Facebook to widget makers is trying to figure out how to better sell ads on social sites, at higher rates than their lows of 5 cents per thousand impressions.

Despite the millions who regularly spend hours on social networks and sites like Flickr or YouTube, advertising spending in the category is worth less than $2 billion annually. (Projections from research firm eMarketer were recently downgraded because of an expected ad shortfall from MySpace.) That's less than 2 percent of the total advertising spending in the United States.

The problem with social advertising is twofold. People aren't very receptive to advertisements in the first place, but they're even less so when "hanging out" with friends virtually on MySpace or sending photos on Flickr. Traditional advertisers, the big spenders on commercials and brand advertising, are cautious when it comes to placing their logo next to racy or potentially inflammatory images. Technology and media companies must find a way around both of these issues.

Goldstein, a veteran Internet advertising entrepreneur, founded SocialMedia in April of last year to initially be a widget developer for social networks. One of its first widgets, Appsoholic, measured how people respond to other applications on the site. With that data, the company realized that it would be better off helping other developers make money from their applications, given that the popularity of widgets can be fleeting.

So it built an automated ad system to sell banner, text, or Flash ads for as many as 5,000 applications running on Facebook, among others. SocialMedia advertisers can target people based on "appographic" parameters like people who've installed dating, car, or travel widgets.

Typical run-of-site banner ads on social networks can cost as little as 5 cents per thousand people they reach, or cost per thousand (CPM), and can go as high as 20 cents per CPM for targeted ads based on someone's profile or interests. Application ads can run as high as 50 cents, according to Goldstein, who's trying to break the dollar mark with social banners.

SocialMedia has tested social banners with BMW in a campaign worth more than $100,000. It created an application for the car company that allows people on Facebook to customize the features of a BMW 1 Series, or create a "dream ride." The related social banners, for example, advertised to Seth's closest friends in their news feeds that "Seth is taking a joyride in a BMW 1 Series on the Autobahn. Would you like to join him?"

SocialMedia's also been experimenting with the ads for Universal Pictures, among others. In early tests, the company has shown that people are 200 times more likely to respond to the social ad. (A non-social ad might command a click-through rate of 0.15 percent vs. a social banner at 0.5 percent.)

Possible privacy concerns
Still, with its social banners, SocialMedia could run into the same privacy concerns that Facebook encountered when it launched Beacon. Late last year, Facebook teamed with sites like eBay and Yelp so that when Facebook members performed an action on one of those sites, like buying a pair of shoes, Facebook would automatically alert their friends to it in their news feeds. After members reacted badly, the company backed off and made the program entirely opt-in for members.

SocialMedia isn't drawing data on people's behaviors from third-party sites, but it is using friendship data it collects to seed marketing messages. That could tick people off. Leslie Harris, president of the Center for Democracy and Technology, said the main issue with social ads like these is that people need to know how they're being targeted and be given the ability to opt out easily.

"People need to have clear notice and the clear opportunity not to participate," Harris said. "The lesson of Beacon (Facebook's controversial targeted-messaging project) was that people have no expectation that they will be linked to or targeted in any way outside of a social network."

Goldstein said SocialMedia will be sensitive to people's privacy, partly because of the backlash prompted by Facebook's Beacon program. People will be able to click a tab on a social banner to read about how it works and how to easily opt out of the program, he said.

At recent social-media conferences, Goldstein has said that programs like Beacon are the future of this type of conversational marketing.

"Technically people are collecting cookies all the time," Goldstein said. "What Beacon has shown us is that when you try to cross information between networks, the psyche isn't ready. But over the years to come you'll be able do this in any forum."

For the first time since 2004, quarterly sales of Web advertisements dipped slightly from the previous three months, according to new research released Tuesday.

From January to March, Internet ad spending hit $5.8 billion, down from an all-time recorded high of $5.9 billion in the fourth quarter of 2007, according to research from the Interactive Advertising Bureau and PricewaterhouseCoopers. Not since the end of 2004 has ad spending retreated slightly from a quarterly percentage growth.

The upside is that first-quarter sales represented an 18 percent rise from the comparable period in 2007. And the quarter's expenditures were the second-highest ever recorded by the IAB.

David Silverman, a partner at PricewaterhouseCoopers, attributed the drop to the overall economic downturn and a typical retraction in media advertising spending from the fourth to first quarter. "The fundamentals of interactive advertising spend continues to be positive and I would expect to see continued growth in the future," he said in a statement.

The IAB and PWC did not break out types of spending, e.g. search vs. display advertising. But a recent report from TNS Media Intelligence showed that the growth of display ad spending has been hit hardest by economic belt-tightening.

Despite the slowing economy, marketers continued spending on Internet advertising last year to the tune of $21.2 billion, up 26 percent from the previous year, according to a report from the Interactive Advertising Bureau released on Thursday.

Keyword search, Google's cash cow, garnered the most revenue and had the greatest market share, 41 percent, followed by display advertising at 34 percent and classifieds at 16 percent.

For the fourth quarter, online ad revenue reached $5.9 billion, a 24 percent increase from the same period a year earlier.

The figures represent the fourth consecutive year and 13th consecutive quarter of record sales, the IAB said. The results met expectations IAB gave in February.

The quarterly report was conducted by PricewaterhouseCoopers and sponsored by the IAB.

Fourth-quarter revenue has increased significantly on a year-over-year percentage and dollar basis for the fifth consecutive year, after declining in 2001 and 2002.

(Credit: IAB/PricewaterhouseCoopers)

2007 fourth-quarter revenue was the highest quarterly revenue total recorded since reporting began in 1996.

(Credit: IAB/PricewaterhouseCoopers)

Spot Runner, an Internet-based advertising network that puts local business pitches on TV and radio, expects to announce Wednesday that it has landed another $51 million from investors including U.K. media company Daily Mail and General Trust (DMGT), Spanish media group Grupo Televisa, institutional investor Legg Mason Capital Management, and the luxury conglomerate Groupe Arnault/LVMH.

(Credit: Spot Runner)

Since its founding in 2004, the Los Angeles-based company has brought in outside investments worth more than $110 million. Previous investors include CBS, Interpublic Group, and Battery Ventures.

The deal underscores growing demand from investors for new advertising technologies for the Web and traditional media. Earlier this year, the open-source advertising network OpenX (formerly called OpenAds) raised $15 million from Accel Partners, among others.

Spot Runner has also lured talent from major Internet companies. Joanne Bradford, who has headed the advertising sales efforts around Microsoft's MSN, recently joined Spot Runner as an executive vice president.

Spot Runner has built a system that identifies unsold TV spots on Bravo, ESPN, and the hundreds of other cable networks, and then sells 30-second spots to local businesses. The ads can be broadcast nationwide, but most small businesses buy ads to run only in their region, which costs less. It does the same with radio.

Spot Runner also helps advertisers put together 30-second spots from a collection of canned art.

Nick Grouf, CEO of Spot Runner, said that the funding will help Spot Runner grow internationally, as well as into new ad markets online and offline. It could also help the company acquire rivals. In March, Spot Runner bought Weblistic, a network for selling online ads to local businesses.

To: Yahoo CEO Jerry Yang
From: Stefanie Olsen, CNET News.com
Re: Getting your company back on track

Now that Yahoo appears to be on its own path, it's time for the company to find in its past what could again make it great.

Contrary to popular opinion, the key to the future isn't becoming a technological marvel to rival Google. Instead, Yahoo should home in on what made it special before the dot-com bust: The Yahoooooo! (cowboy twang inserted) of yesteryear.

Yahoo was an Internet media pioneer. The company built or bought every massively popular feature on the Web today--think Broadcast.com (video), Launch (music), and Groups (social networks). It also developed an advertising engine that could deliver on the dream campaign of any marketer with the data to back up that promise. You could argue that Yahoo failed to take advantage of many of those assets in recent years, but the shortcomings haven't been in vision, they've been in execution.

So how does Yahoo move forward? It needs to rebrand itself an Internet media company, quit chasing Google on Web search, and get damn good at selling brand advertising to Madison Avenue once again. And it has to get it done before Google figures out how to turn the creative ad process over to robots. Does technology play a role in that future? Of course. But the emphasis should be on technology that makes ad sales possible, not ad sales that make the technology possible.

"Yahoo was basically built for brand advertisers before brand advertisers came online in a big way. Now that they have come online, Yahoo has to have better technology to allow for better targeting and scale," said Rishad Tobaccowalo, CEO of the futures-consulting company Denuo, a unit of advertising agency holding company Publicis.

Yahoo certainly has been selling technology, but not in the way Tobaccowalo is talking about. Earlier this year, executives started beating the drum about getting back to the technology roots with new products like advanced e-mail, mobile-search technology, and a universal log-on for Yahoo members across services like Flickr, Mail, and Address Book.

Those initiatives are worthwhile, but Yahoo should be selling a bigger story to Madison Avenue, particularly as Google tries to build a division for selling brand advertising alongside search. Sure, Yahoo has advertising platforms like Panama, but the company still isn't reaping the full value of its media network. Quite simply, it isn't showing the swagger of its younger years among advertisers. (Note: avoid the cockiness that turned some advertisers off in the early years.)

Ad executives say Yahoo should combine Web search and brand advertising, and sell marketers a new package on the Web. "No one has properly integrated their platforms of search and display advertising. Even though Yahoo has integrated those ad sales teams, no one is treating it as a 'solution,'" according to an entertainment advertising executive who asked to remain anonymous.

That means Yahoo and its rivals are missing the chance to up-sell marketers on more ads, with better use of historical Web data. "The interactive promise is that you take this great amount of data and bake it into a pie, but that's not happening," the executive said.

Despite its talks with Google, Yahoo could easily stay independent on Web search. Several major advertisers have said the company's search marketplace performs almost as well as Google's. More importantly, Yahoo and Microsoft counterbalance Google's dominance and pricing power in the market.

(Credit: Dan Farber/CNET News.com)

No doubt, search is essential to the Web economy, but the next major phase of growth for Internet advertising will come from major brand advertising. If smart, Yahoo should be in the cat bird's seat with a network that reaches half a billion people worldwide annually.

In 2007, U.S. online advertising spending was at $21 billion, up a whopping 26 percent year over year compared with a 7 percent decline in newspaper advertising or 3 percent drop in radio ads, according to data from PricewaterhouseCoopers and the IAB. That spending is still only around 9 percent of the $469 billion spent on advertising in the United States across newspapers, television, radio, and direct mail.

The gap between what the top 100 U.S. advertisers spend online is even greater. In 2006, the most recent year of data on ad spending from research firm TNS, the biggest brands in this country put only 3.1 percent of their ad budgets online.

One reason is that agencies and advertisers are slow to follow audiences. Last year, people devoted about 29 percent of their media hours on the Internet, but advertisers spent only 8 percent of their budgets on the Web, according to a January report from Forrester Research. In contrast, people spent about 37 percent of their media time watching television; and with roughly equal measure, advertisers spent about 36 percent of their budgets on TV.

Newspaper ad spending was out of whack in the reverse. People devoted 8 percent of their media time to reading the paper last year. But advertisers spent 20 percent of their budgets on the medium. Put another way: advertisers are spending an average of $288 to reach a household via the Internet, vs. $818 via newspapers.

But that is changing quickly, advertisers say. Brand advertisers are quickly trying to figure out their online strategies and how they can reach the most people with the fewest number of media outlets. And they need companies like Yahoo and AOL more than ever, because portals like Yahoo can help brand advertisers reach hundreds of millions of people much like a TV audience.

Brand advertisers have a problem with search because it has inherent limits in inventory. Search makes more sense for direct marketers. Brand advertisers want video and engaging content that they can wrap their logos around, and that content online is now with the television networks and the YouTubes of the world.

Yahoo certainly has engaging content. Among the top most visited Web sites, Yahoo's audience spent an average of three hours and 12 minutes with the site in March, according to Nielsen Online. AOL's audience spent nearly four hours on its site; and Google's visitors racked up only one hour and 15 minutes. Microsoft: 44 minutes. YouTube: 50 minutes.

Brand advertisers also want the reach without the uncertainty of a social network, where their brands can appear in an unsavory context.

"A lot of the newer sites like MySpace and Facebook prove that not everything that's important can be monetized, because they haven't proved to be major places for advertising yet," said David Hallerman, senior analyst at eMarketer. "People equate declining importance of portals with non-importance, but portals are important for brand advertisers because they get their most valuable reach and that's not going away."

"That's why we're so far from the end story on Yahoo even with Microsoft bowing out," he said.

Despite recent proclamations of a technology focus, Yahoo has always been a media company, or a cultural curator to the Internet. Its historical talent has been in aggregating content from across the Web and creating compelling destination sites around news, finance and entertainment that keep people coming back. Technology was more of the engine, rather than the driver.

Yahoo was also one of the first companies to promote a data-mining group designed to use all those virtual tracks people left across its network to pinpoint how, when and what type of brand advertisements they would respond to next. Of course, Google came along and proved more immediate value in search.

Now it's time for Yahoo to pick up the brand advertising story once again, helping to lift up pricing of sponsorships and branded campaigns.

Yahoo's former sales chief Wenda Harris Millard, who's now the IAB's chairperson and president of media for Martha Stewart Living Omnimedia, said it well at a recent IAB event: "We must educate one and all about the value our digital offerings provide marketers and not trade our advertising space like pork bellies."

In short, Jerry, it's all about the ads.

"Yahoo will rebound in a different form. They have to decide who are they talking to and what value they are adding. They still have a sales force plugged into agencies and Panama that seems to be working. It also has a new open model," Tobaccowala said.

"Everyone in Silicon Valley has a strange self-esteem problem, if they don't think they're hot, they think they're not," he added. "My sense is that internal Yahoo people don't think they're hot in this game."

The Associated Press, a news cooperative owned by its print-newspaper contributors, said Friday that it and Microsoft have built a back-end platform that lets Web publishers syndicate online video to other sites across the Web. The upside: the video creator, Microsoft, AP, and the Web site publisher share in the revenue from video advertisements linked to the content.

The AP service, called the Online Video Network (OVN), lets members upload video to their site's player and then share it with anyone else on the network, which could include the U.S. Web sites of member newspapers, TV networks, or radio stations. With the service, publishers also have some measure of control over which sites can syndicate their video.

(Credit: Associated Press)

For example, a New York newspaper could upload video of a local fire, and set restrictions on the content that gives only publications outside the New York City metro area the rights to use the content. That way, it would have the exclusive for the New York City area (even though locals might be able to find the video on a national Web site that syndicated the material).

Robert Aitken, product manager of online video for AP, said that the service is the newest iteration of a 2-year-old project. The original platform offered a fairly basic video player that allowed local affiliates to upload either their own video (to play on their site) or content created by AP's staff. If a local newsroom posted its own material, it would collect a 50 percent cut of the advertising revenue, with the remaining share following to Microsoft and AP. But if it posted the AP's content, the publisher would get a 20 percent cut, with Microsoft and AP each receiving 40 percent. (Microsoft seems to come out well in all these equations.)

With the new system, content creators (inside and outside of a media outlet) that sign up for the network can create video to syndicate to all of AP's 1,800 affiliates, which collectively reach as many as 61 million unique visitors monthly, according to Aitken. In that scenario, a content creator that syndicates its video to a publisher would get a 30 percent cut of ad sales; the publisher, a 20 percent cut; and the remaining 50 percent would be split between the AP and Microsoft.

Contents creators are protected from digital thieves, Aitken said, because the video is contained within a video player. Other Web sites could take the video player, but it's consistently linked to an advertisement.

"In a lot of cases, something might be borrowed and the original copyright owner is not compensated," Aitken said. "But if you upload your video (in this system) you'll always be compensated."

Advertising executives on Madison Avenue, who have always liked to watch a good fight, are more bemused by the Yahoo-Microsoft action than concerned by which company wins.

Ad firms have a big influence on the future of Google, Yahoo, MSN, AOL, and News Corp. by deciding on behalf of clients how much of their budgets to spend with each company, if at all. While the players are important, advertisers don't really seem to care which teams are aligned, as long as they can provide the audience, the ad space, and the return on investment for clients.

The dominant response from members of the advertising community interviewed by CNET News.com is that a new marriage wouldn't change anyone's ad budget.

"The way people like us look at it is as interested but detached observers," said Tim Hanlon, executive vice president of Denuo, the media futures practice of advertising agency Publicis Group.

"If you chart it all out and take those five companies, they all have strengths and weaknesses," he said. "Not one of any of those potential partnerships would solve all the problems. There will still be no one-stop shop for advertising online."

Much of the drama revolves around the coveted search marketing business, which Google dominates. Microsoft obviously wants to absorb Yahoo to mount a more formidable challenge to Google in search engine advertising, as well as take a larger share of the search budgets of advertisers. That's a good thing, advertisers say, because a united Yahoo-Microsoft could help make pricing more competitive.

But it remains unclear to companies that advertise with Google whether a Yahoo-Microsoft combination would change their spending. One ad executive at a major agency, who asked to remain anonymous, said a Yahoo-Microsoft alliance wouldn't take away from how much money he spends with Google, nor potentially how little he spends with Yahoo or MSN.

The executive admitted that advertisers like him have likely contributed to the anticompetitive climate that exists today, giving Google the edge in ads and traffic. When asked whether a Yahoo-Microsoft merger might cause his agency to spend more with the combined entity, he said "maybe."

Another advertising industry observer took a more negative attitude when it came to a Yahoo-Microsoft alliance.

"With Yahoo and Microsoft, you're taking two companies who are spending all their time copying each other's ideas--the company that created Yahoo Answers and the company who ripped them off by creating Live Q&A. Why does that change my ad budget?" asked Chris Tacy, chief innovation officer at Method, a branding company in San Francisco.

Apart from search, a Microsoft-Yahoo marriage could make the two more forceful in content and brand advertising, an area of weakness for Google. The search giant is trying to break into brand advertising with video on YouTube and graphical ads on its ad network.

But so far, Microsoft hasn't pitched the advertising community on why a Microsoft-Yahoo deal would be strategically interesting for their advertisers. Grant McDougall, executive vice president at advertising agency Carat--which plans media buys for Ecostar, the Gap and Pfizer, among others--said Microsoft could bring more discipline to Yahoo in terms of improving its marketing-analytics tools, but he has yet to hear the reasoning from Microsoft.

"What will it do for budgets? In the short term, probably nothing," McDougall said. "This is a long-term play, and Yahoo has to think about where it wants to be--does it want to be a search company or a content company?"

What's more intriguing to advertisers are the possibilities of partnerships between Yahoo and News Corp. (and its MySpace.com social network) or Yahoo and AOL. Many advertising executives say it's easier to see deals for long-term creative advertising across Yahoo and MySpace, or across Yahoo and Time Warner's AOL. Combining brand advertising, targeted behavioral ads, and search ads seems appealing to the advertising community.

"A Yahoo-News Corp. deal or a Yahoo-Time Warner deal would allow us to sync our marketing capabilities. That's really exciting," McDougall said.

Similarly, other advertisers said the Microsoft-Yahoo deal might alienate the ad community in more ways than one, if Microsoft start to make a pitch on why it's important. Software companies, for example, might not want to advertise with Yahoo, if it means the money goes to Microsoft.

"If the Yahoo-Microsoft thing happened, there's the phase of people talking about its promise, but the reality is, people hunker down, and there doesn't appear to be a hard-core defined strategy of what it means to our community," said Rob Kabus, executive vice president of strategy at Aegis, a communications holding company.

"In the absence of that," Kabus said, "people get to be "show me the numbers" about their advertising buys rather than open to bigger strategic alliances."

(Credit: QQ)

I just returned from a trip to Shanghai, and in case you didn't know anyway, here's my No. 1 insight: China scales.

Let's take QQ.com as an example, the leading Chinese online social network. The site is reported to have more than 300 million active accounts. That is eight times the member base of Facebook--and it's the same size as the U.S. population.

What's also remarkable (and different from the Western social networks) is QQ's monetization. Facebook posted revenue of $150 million for 2007 (and according to Plus8star a loss of $50 million); MySpace.com (purchased by News Corp. for $560 million) is projected to generate $750 million in revenue this year; and Bebo (purchased by AOL for $850 million) had revenue of just $20 million in 2007. While QQ reported revenue of $523 million and an astonishing operating profit of $224 million in 2007. The revenue distribution is unusual, too: 60 percent of the revenue came from services like games, an additional 21 percent from mobile services like ringtones, and only 13 percent from online advertising.

Do added value services trump ad based revenue models?