Google Adsense and other contextual programs do work. Although our analyses haven't yet explored consumers' feelings towards text ads, a partnership with Google generates over $200 million for AOL alone. Our own analysis into relevant copy in the context of what consumers are interested in has yielded positive response upwards of 10% for a message. It's likely higher for text ads.
As you know, the business is big enough (apprx. $2.6 billion for the keyword search segment - of which Google gets close to a $1 billion ) to actually influence the way everyone delivers their search results, most recently MSN and AskJeeves.
The big search providers are even improving their services to make these ads even more relevant to searchers - i.e. adding local search, making other files searchable, and even building their communities with blogs, emails, etc. Another important trend is gaining momentum, narrowcast search - i.e. download.com, daypop.com, and business.com, findlaw.com. Google has even launched "Site Flavored Google Search" that allows webmasters to insert Google into their sites so that visitors can search in verticals specific to the content of the webmaster. Narrowcasting ultimately makes a search more relevant to the visitor.
With regards to search traffic, Google (38%), Yahoo (28%), AOL (16%) and MSN (15%) dominate "search-specific traffic on the internet", with other search engines serving the remaining search queries (2). But when it comes to market share for text ads, Overture and Google lead. (Editorial note: It's difficult to get exact numbers since Google isn't yet public and MSN contributes too small a portion of Microsoft's total revenues to be noted anywhere on their annual report. Yahoo, through analyst coverage, does offer a peek into their average click charge for text ads, which has maintained relatively "flat" since last year. 
There are two types of charges from search: a) bidding and b) inclusion fees. Bidding on certain keywords is the dominant form, as it's pay-per-performance, allowing greater budget flexibility for all and better experience for consumers. Inclusion is advertisers paying to be included prominently above regular search results and is slowly disappearing [MSN recently got rid of it in it's new delivery]. )
We do not recommend using contextual advertising on your own. There are several search marketers out there with relationships and accounts with big and small search engines. These guys offer a bigger bang for your buck because they have the ability to actually manipulate rates in a bidding marketplace due to their size. They can also provide a better benchmark of the performance of your campaign since they're seeing several large-scale campaigns simultaneously.
We recommend that content sites explore using contextual advertising, whether to direct visitors to other sections of your site or advertising. Not only will it preserve the natural experience of visiting your site, but it will effectively "monetize" your content without negatively impacting the perception of your brand.
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(1) "IAB Internet AdvertisingRevenue Report" (PDF)
(2) "comScore Media Metrix Search Engine Ratings"
(3) "Winners and Loser's of the Yahoo Trend"
(4) "Yahoo's 2003 Annual Report"Top
- "How Search Engine Rank Impacts Traffic" (PDF)
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