AOL Plans to Buy Behavioral Targeter Tacoda

AOL announced yesterday that it will purchase behavioral ad targeting company Tacoda Networks and run it as an independent subsidiary.

Terms of the sale were not disclosed, although Reuters quoted “asource familiar with the deal” as saying that AOL would spend $275 million to buy the online ad platform.

Tacoda operates patented technology that lets advertisers serve up display ads based on users’ previous behavior on the Web. Where text-based sponsored links are triggered by keywords—either from users’ searches or from the content they are currently looking at—behavioral ads assume that readers who looked, for example, at an article about hybrid cars a week ago might be interested in seeing an ad for one today.

“The acquisition of Tacoda will build on our advertising momentum, letting us better serve advertisers by enhancing our ability to precisely target advertisements across an even broader network,” AOL president and COO Ron Grant said in a release.

AOL has said it will operate the Tacoda Audience Network separately from Advertising.com, which also offers behavioral targeting.

The deal is AOL’s latest step to enhance its portfolio of advertising options, in service of its stated aim to move away from its subscription-based roots and into an ad-based model. The company, which has owned the Advertising.com display-ad network since 2004, started this latest buying round in January 2007 with the acquisition of video search engine Truveo. Then in mid-May, AOL started spending in earnest, buying mobile marketing platform and network Third Screen Media, video-ad platform Lightningcast, and Adtech AG, an international ad-serving platform.

The agreement to buy Tacoda also comes at a time when AOL’s own Web metrics are getting the benefit of a policy change by Nielsen//NetRatings, one of the leading online audience ranking providers. Nielsen’s new measurement of total monthly minutes spent online with a brand puts AOL first for May 2007 with 25 billion minutes online. Most of those minutes were spent using popular AOL features such as e-mail and AOL Instant Messenger, just as most of second-place Yahoo!’s minutes were occupied using mail, IM and other communications features. Google ranked fifth in the new metric, behind those two, MSN/Windows live and Fox Interactive, parent to MySpace.com.

A bid to buy Tacoda was widely anticipated as part of the ongoing consolidation within the online ad industry. With Yahoo!’s acquisition of Right Media, Microsoft’s pending purchase of aQuantive and Google’s plan to buy DoubleClick, some observers have expressed the belief that the days of independent behavioral ad networks are numbered. Anil Batra, a Web analytics consultant at the ZAAZ interactive ad agency, pointed out in a blog post last May that with Google, Yahoo! and Microsoft owning or buying behavioral targeting capabilities, BT networks such as Tacoda and Revenue Science are at a real disadvantage.

“These networks don’t even have their own ad serving system,” he wrote. “They just provide the technology to identify segments and then rely on other ad servers like [DoubleClick or Atlas] to serve behaviorally targeted ads.”

Behavioral targeting has to date been more widely deployed by brand marketers than direct-response advertisers, since the tactic is better suited to reaching interested viewers than to pinpointing highly qualified in-market shoppers. Web marketing agency eMarketer predicts that behaviorally targeted online ads in the U.S. will grow from $575 million this year to $1 billion next year and to $3.8 billion in 2011, largely through greater spending by brand advertisers.

But the large search engines have also shown recent interest in using behavior to add relevance to the ads they deliver to users. Yahoo! has offered behavioral targeting on its owned and operated Web network for years and recently soft-launched SmartAds, a product that combines geographic, demographic and behavioral data (including search data) to deliver more relevant display ads. Microsoft began offering behavioral ad targeting on its own Web properties last September.

While Google has kept behavioral targeting at arm’s length, maintaining that it will not deploy any tracking without user permission, the company has filed for a number of patents that add abilities to track user behavior on the Web. Google’s proposed purchase of DoubleClick also added to speculation that the search giant might want to spread its targeting power beyond the keyword-and-context realm into behavior.

That speculation is rooted in history. At its inception in 1999, DoubleClick operated a platform that tracked and logged user behavior anonymously, and when it acquired Abacus Direct floated a plan to combine that observed online behavior with offline data such as user names and addresses. Only public outcry and an FTC investigation led the company to abandon those plans.

DoubleClick is the leading online ad-delivery network and monitors those ads with cookies. If the Google sale goes through, the company will have tracking code on both the majority of search results pages and on a large proportion of Web pages—a prospect that may beg to be monetized in some acceptable way.

The AOL-Tacoda deal will presumably face the same anti-competitive and privacy-protection scrutiny that the previous deals from Google, Microsoft and Yahoo! have encountered. In fact, privacy groups might act to make sure the deal receives more than the usual study because of AOL’s accidental disclosure last August of search data, which led to complaints filed with the FTC.

But the deal’s approval chances may also benefit from Tacoda’s reputation for putting Web consumer privacy at the forefront of its business model. Earlier this year, the company announced new guidelines for data collection that include clear notice to all consumers about the Tacoda ad targeting system and the ability to opt out of it, either on jump pages linked to participating Web sites or on Tacoda’s home page.

Tacoda chairman Dave Morgan has also testified on privacy protection before Congressional committees and serves as the head of the public policy council of the Internet Advertising Bureau.