Whenever ad networks talk about their “targeting” remember the Netflix prize

A quick rant:

Every time you talk to an ad network or leadgen network or whatever, if you ask what their differentiation is they will say “targeting.” That’s probably wrong, and let me tell you why, based on the recent announcement of the Netflix prize winners:

Netflix was able to wring three years of research to nudge its recommendation algorithm up 10.5 percent, at a cost of $1 million in prize money — a stunning feat on its own.

This means if you combine dozens of the best machine learning people in the world, some of the cleanest datasets, you get a measly 10.5% increase. Compare this to starting a new ad network where you end up with noisy datasets, lots of crappy traffic, and a small team looking at the problem – that’s not an easy path to disruptive change. In general, 10% is not a big enough number to counteract the other economic drivers in the ad market, which revolves around better deal terms, a larger selection of advertisers, better ad inventory, etc.

I would guess that you need a number closer to 50% lift or higher in order for an upstart to dramatically change the ad landscape and neutralize the weapons of the mass of ad network players.

I think disruptive change will come not from algorithms, but rather two other areas:

• Better ad inventory: New websites and mechanics emerge all the time, and who knows what happens when you put ads on them? It was clear, until they tried it, that with the right ads search can be >30% clickthrough rates or more, which is unheard of.
• Better data: The other big opportunity is in using specialized data to drive your algorithms – rather than basing everything off of domains, cookies, and ad impressions like everyone else, there may be ways to extend the targeting to unique datasets that no one has access to. This is what’s happening in the world of retargeting.

The Netflix prize also included people adding in additional data, and that’s factored into the 10.5% improvement. Anyway, the point is, increasing performance on stuff like this is very hard, so when an ad network tells you about their targeting, you should push them instead on their revenue split ;-)