Yahoo Labs forms group to target advertising

Yahoo AdLabs will do research and crunch data to build better tools for advertisers

Yahoo Labs has formed a team to improve the targeting and effectiveness of online advertising, the company said Thursday.

[ See also: Move over Google Labs...Yahoo! is here ]

Yahoo AdLabs aims to help advertisers get more out of their marketing dollars by combining research and data mining with watching how users interact with ads.

The group has been operating quietly within Yahoo Labs for about six months. It has a relatively small staff today but is looking to hire more "top talent," said Ken Mallon, the Yahoo vice president in charge of AdLabs. He declined to reveal the group's budget.

As an example of the work it does, Yahoo released the results of a study that shows the effectiveness of "hyperlocal" advertising, which is serving users ads for stores that are within two miles of where they live.

The study was conducted at an "unprecedented scale," involving 3 million Yahoo users, according to Prabhakar Raghavan, chief scientist and the head of Yahoo Labs. It revealed, among other things, that hyperlocal ads give a five-fold return on ad-spend when measured in sales at the local store.

"It's not just intuition, we can quantifiably measure these things," Raghavan said.

The company is running a pilot program to test the AdLabs services with several large advertisers, which it didn't name. As well as retail it is working with advertisers in the banking, auto and other industries, Mallon said.

It will publish some of the data, as it did Thursday, and will use it to develop new products for advertisers, he said. AdLabs is something of a customer facing organization, he said, that will draw on work done elsewhere in Yahoo Labs, as well as by its own scientists, and present it to advertisers.

Yahoo has scaled back its investments in search, since it now uses Microsoft Bing to power its results. So it makes sense for the company to increase its focus on advertising. Yahoo is strong in display ads -- its revenue from that sector rose 14 percent last quarter, to $635 million -- but it is weaker in the bigger market for search advertising, where Google dominates.

Yahoo has several ways of figuring out where users live to help conduct its research. It can use an IP address, data it gathers from mapping or geo-tagging services, or addresses people provide when they sign up for services. Yahoo already has 100 million "addressable users," Mallon said -- users for whom it has both a name and a street address.

If a user also provides their email address to a local store, to sign up for a loyalty program, for example, Yahoo can match the user to the purchase and figure out how many people who clicked on an online ad went to on to make a purchase at their local store. That's how it performed the hyperlocal study.

As with all services that track user behavior closely, Yahoo will have to be careful not to stir up privacy concerns. Raghavan said Yahoo employed an outside company to match the ad clicks with the purchase data, so Yahoo and the advertisers received aggregate data and not people's individual purchase history.

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