Technology, Venture Capital, Private Equity

I notice that not too many people talk much about Hotmail these days. It appears that given the plethora of “Ajax based” and other popular email services such as Gmail and Yahoo! mail, Hotmail seems to have taken a backseat. Yet, I would rate Hotmail as one of the epoch making events in the evolution of the internet. Reason, it basically heralded a new economic model, which has since become a key characteristic of the interent era, which is to offer a service free of cost to the end user, and monitize it by means of advertising. And with time, this model too evolved and became more sophisticated, and now, in a sense we seem to be back to where it all began, thanks to how things have shaped up and led us to what is now being called behavioral targeting.

In the initial days of the internet, the advertising was pretty random. Any banner would go with any page irrespective of content on the page, the reader etc. Then, came in various models for targeted advertising. These included demographic and contextual segmentation, the latter of course which Google has come to “perfect” and “own” through its AdSense program. However, the trend here seems to suggest that we could be moving towards much greater levels of intelligence being incorporated in making the ads more relevant (and thus improve CTRs) than ever before, and behavioral targeting (BT) seems to be an important component of that. Broadly speaking, BT refers to serving of ads depending on the “behavior” that users display on websites. Therefore, it involves tracking user behavior, click stream analysis and the like. When mixed with demographic knowledge of the users and the context of the published content, it is hoped that highly relevant ads can be served, which users would be “irresistably drawn to click”, to the obvious delight of the publishers and the ad networks. eMarketer has recently published a report that projects the BT ad market will rise from the current $0.5 million to $3.8 million in 2011. The biggies of the online world all seem to be jumping on to the BT band wagon. AOL recently acquired TACODA, the pioneer of BT for $275 million. Yahoo has announced that it will be increasingly focusing on BT and so has MS. Google has conspicuosly remained subdued in this regard, which could perhaps be more attributable for strategic reasons (which is, “contextual advertising is working well for us, so why should we do something different?”) rather than for other (user privacy related) publicly cited reasons. Anyway, whats clear is that if BT really takes off in as big a way as it is projected, the key success parameter in that scenario would be knowledge of the identity of the user. Thats where Yahoo’s huge email user base would give it a huge leg up over others. Nearly a third of Yahoo’s page views are on its yahoo mail and until now, monetization of these page views has been a challenge. But, with BT, this could indeed become yahoo’s greatest asset. It could use the identity of the user and track how he “moves” across the plethora of Yahoo properties and accordingly serve the ads - BT at its best. Talk about coming a full circle with email and advertising.