Widgets: the future of online ads

This post was also published in BusinessWeek.

Widgets: The Future of Online Ads
Look to the evolution of television advertising to understand the necessity of widgets in today's online world

The sheer volume of Web sites has grown so overwhelming that an increasing number of consumers—not just those in their 20s—are adopting multipurpose tools to help them manage and personalize the vast amount of data thrown at them every day. The mainstream adoption of online social networks such as Facebook and MySpace and personalized home pages such as iGoogle and Netvibes reflects attempts by consumers to make the Web more manageable. This new mindset, not surprisingly, also holds for the way in which the audience is willing to engage with ads.

Advertisers, many of which have only just begun shoveling more of their marketing dollars into promotional banners and boxes on Web sites, had better heed this shift sooner than later. Some Web trends prove to be fads, of course. But when hordes of consumers start shifting from one technology to another, it's a good bet "old" marketing strategies will grow less effective. (Or so I say, which is why I started a new company called iWidgets last year to help advertisers develop campaigns that embrace the new mentality.)

Learn from TV

If this shift in consumer behavior in response to information overload sounds familiar, it should. We've seen much the same with television. When there were only three major networks, people would walk up to the TV, choose a channel, and watch it for a while. When cable television emerged, people would flip through 50 to 75 channels to see what was on. But with the advent of digital cable and satellite TV, which made hundreds of channels available, many overwhelmed viewers started looking for ways to manage and filter the content. This created a market for digital video recorders, such as those from TiVo (TIVO), and on-demand programming. This in turn changed the game for marketing, as users were suddenly choosing which ads, if any, they'd watch.

This same phenomenon is now taking hold online. Instead of visiting more and more Web sites, users are shifting to the TiVos of the Internet. Consumers are using RSS aggregators to display news and blog postings from numerous sources in one place. They're using personal portals such as iGoogle and Netvibes to view customized collections of stock quotes, local weather updates, and relevant news headlines at a glance. They're using social networks including Facebook and MySpace to share pictures and "what's up" with friends, family, and even business associates.

A Behavioral Shift

As with TV, this behavioral shift is having a significant impact on the online advertising industry, a multibillion-dollar business dominated by Google (GOOG). Until recently, the whole thesis of online marketing has been that ads need to be propagated across thousands of Web sites so that users see them, click on them, and visit advertisers' sites. But nowadays, there are several problems with this approach.

One is that users are not as willing to leave the site they're using to visit an advertiser's site. Although the economic downturn may be playing a role, it's worth noting that Google and Yahoo! (YHOO) both recently reported drop-offs in their click-through rates (BusinessWeek.com, 2/27/08). The two companies have come up with a myriad of explanations, but the reason is actually very simple: Web users are setting a higher bar for advertisers to lure them to another site.

In fact, many users are starting to ignore ads altogether, a phenomenon known as "banner-ad blindness." At the same time, with advertisers shifting more and more of their marketing dollars online, the cost of an "impression"—placing an ad on a site—keeps rising. The net result is that online advertisers are now paying more to get less.

Beyond Online Billboards

So how should advertisers adjust to this new situation? First, let's look at what they're buying when they place an online ad. They are buying a piece of real estate on a Web page that's essentially no more than a link to another Web site. But that rectangle of space can also be exploited to function as a site within a site. Instead of just replicating a billboard on the side of the highway in a bid to get users to click and go somewhere else—something they hate to do—the ad should actually let them do something right then and there. Right in that little box, without switching sites, users should be able to browse products, customize orders, and eventually make a purchase. This concept of a little Web site embedded within another Web site is called a widget.

Widget ads are just the first step. Instead of simply trying to build brand awareness, marketers now have the ability to reach out to customers with useful features to enhance their personalized pages on social networks. An athletic gear company could offer an application that lets a group of running buddies track how their times and distances compare. An airline could offer a "come visit me" application that displays the latest fares for a trip between the hometowns of viewers and Web page owners. Even better, an airline might offer a widget that lets users track their frequent-flier miles and search for award trips right from their iGoogle pages. These types of applications can be useful, engaging, and viral—when you see one on your friend's profile, you are likely to install it as well.

Advertisers and consumers have played a game of cat and mouse for years. As we've learned from the ongoing upheaval in the entertainment industry, online advertisers have to adapt their approach to match consumer behavior, or risk irrelevance. They need to move beyond glorified billboards and deliver useful, engaging applications people will want to use and share.

Peter Yared is a serial entrepreneur and the founder and CEO of iWidgets, a San Francisco startup helping brands deliver next-generation Internet advertising.