Those little ads - 12 word snippets of text, linked to topics that interest users - have turned Google into one of the biggest advertising vehicles the world has ever seen. This year, Google will sell $US6.1 billion ($8.26 billion) in ads, nearly double what it sold last year, according to Anthony Noto, an analyst at Goldman Sachs. That is more than is sold by any newspaper chain, magazine publisher or television network. By next year, Noto says, he expects Google to have ad revenue of $US9.5 billion. That would place it fourth among US media companies in total ad sales after Viacom, News Corporation and the Walt Disney Co, but ahead of giants including NBC Universal and Time Warner.

Not content to just suck advertising dollars from web searches, Google is using its windfall to pay for ambitious projects that could radically disrupt other industries. Among other things, it is offering to build a free wireless internet network in San Francisco, plans to scan nearly every book published and is testing a free classified advertising system it calls Google Base. More quietly, Google is also preparing to disrupt the advertising business itself, by replacing creative salesmanship with cold number-crunching. Its premise so far is that advertising is most effective when seen only by people who are interested in what's for sale, based on what they are searching for or reading about on the web. Because Google's ad-buying clients pay for ads only when users click on them, they can precisely measure their effectiveness - and will pay more for ads that really sell their products. Google created what it says is one of the most sophisticated artificial intelligence systems ever built. In a fraction of a second, it can evaluate millions of variables about its users and advertisers, correlate them with its potential database of billions of ads and deliver the message to which each user is most likely to respond.

Users click ads 50-100 per cent more often on Google than they do on Yahoo, Noto estimates, and that is a powerful driver of growth and profits. "Because the ads are more relevant," he says, "they create a better return for advertisers, which causes them to spend more money, which gives Google better margins." (Yahoo is working on its own technology to narrow that gap.) Google already sells its text ads for many other sites on the internet and is also moving to sell the picture-based interactive advertising preferred by marketers. Now it is preparing to extend its technology to nearly every other medium, most significantly television. It is looking toward a world of digital cable boxes and internet-delivered television that will allow it to show commercials tailored for each viewer, as it does now for each Web page it displays.

EricE.Schmidt, Google's chief executive, explains its astounding success in advertising - and reconciles it with the founders' distrust of hucksterism - by suggesting that advertising should be interesting, relevant and useful to users. "Improving ad quality improves Google's revenue," he said in an interview at the company's headquarters, known as the Googleplex. "If we target the right ad to the right person at the right time and they click it, we win." This proposition, he continues, is applicable to other media. "If we can figure out a way to improve the quality of ads on television with ads that have real value for end-users, we should do it," he said. While he is watching television, for example, "Why do I see women's clothing ads?" he says. "Why don't I see just men's clothing ads?" The media and advertising industries certainly see a future in which television ads are aimed at individual viewers. But few apart from the engineering PhDs at Google think that television ads should simply be utilitarian, rather than entertaining, provocative or annoyingly repetitive - the models that have worked so far. And some media industry executives wonder whether Google, which has become the most powerful force in internet advertising, should also become the clearing house for ads - a kind of advertising Nasdaq.

"For all of us to throw all our eggs in the Google basket is dangerous, because no one should have that much power," says Jeff Jarvis, who publishes BuzzMachine, a blog about the media, and is a consultant for About.com, a division of The New York Times Company. He adds that if Google were to expand its ad sales to other media outlets, prices would fall. "Google commoditises everything," he says. There is no better example of that than Google Base, which allows users to post all sorts of information free, including classified ads, he says. Newspapers, which increasingly use Google to sell ads on their own web pages, will see Google Base as a "frontal assault" on their lucrative classified-ad business, and they will say, "I can't trust Google," Jarvis says.

Brin says preliminary versions of Google Base have leaked onto the internet and that the company's partners should not fear it. "Google Base is as much about classified as it is about zoology," he says. The job of sourcing revenue for Google fell to Omid Kordestani, a former Netscape sales executive who was brought to the company in 1999 by K. Ram Shriram, another Netscape alumnus and an early Google investor. Kordestani explored a range of ideas, including charging users for searches as well as selling Google's technology to corporations or to other websites - notably Yahoo - that were less shy about selling ads. Eventually, in 2000, Google started to sell text ads on its own site, but they were only a few lines of text placed above the search results. There were no graphics and no banners and the ads were sold at fixed prices.

In early 2002, a Google employee, Salar Kamangar, now 28, convinced Schmidt and the founders to switch to an auction-based system where advertisers paid only if their ad was clicked on, and the advertiser who bid the most per click was listed first. Kamangar, though, argued that rather than giving priority to advertisers that bid the most per click, they should prefer ads that brought in the most money - a combination of the bid and the number of ad clicks on the ad. This was more profitable and linked readers to ads that were more relevant to them. He also suggested using a Vickrey auction - that is, charging the winner only US1c more than the second-highest bidder. That gives advertisers an incentive to bid high.

Page and Brin were suspicious of any system that put high-bidding advertisers at the top, Kamangar says. "They thought if someone was willing to pay more it was a negative," he recalls. But he was able to convince them that the site could be improved by incorporating how often users clicked on an ad. Schmidt, who was still new as chief executive, feared moving to an entirely auction-based system - amid a recession in online advertising - could be financially disastrous. In fact, revenue quickly increased tenfold. As Google's audience took off, advertisers large and small came running. Among the largest is eBay, which has long bought keywords for nearly every sort of merchandise it sells.

"The smartest thing that Google did was getting smaller advertisers to buy in," says Ellen Siminoff, the chief executive of Efficient Frontier, an agency that helps advertisers manage their campaigns on search engines. She estimates Google has two to three times as many advertisers as Yahoo does, largely because Yahoo has a US10c minimum bid. This lets Google earn money on more obscure search terms for which rivals have no ads. This growing advertising business gave Google the confidence to expand its audience. Most significantly, in 2002, America Online brought in Google to replace Overture, which provided both searches and search ads; that deal enshrined Google as the premier search engine and ad network. Google won the deal by guaranteeing AOL a substantial sum, which it will not disclose. "If we were wrong," Kordestani says, "there were some scenarios that would bankrupt the company."

But by that point, Google had figured out that the same sort of computing and engineering skill that it used to find web pages could also be used to improve the quality and, ultimately, the profitability of advertising. Google introduced its current system for determining which ad to show on which page late last year. It is a wonder of technology that rivals its search engine in complexity. For every page that Google shows, more than 100 computers evaluate more than a million variables to choose the advertisements in its database to display - in milliseconds. The computers look at the amount bid and the budget of the advertiser, but they also consider the user, including their location (by analysing internet connections), the time of day and myriad other factors Google has tracked and analysed from its experience with advertisements. This technology is both amazing and potentially frightening. Google already collects and keeps vast amount of data about what web pages and advertisements each of its users click on to select the ad shown on each page. For now, Google says it identifies users only by a number in a cookie it places on each computer that uses Google. It says it has not connected the vast dossier of interests and behaviour to specific users by name. But that could change as it offers more personal services and works more tightly with partners who already have such personal information.

Lauren Weinstein, the founder of the Privacy Forum, said the data that Google collects creates troubling privacy issues, especially because it declines to say what data it keeps or for how long. "If you start to target people based on a corpus of data, it can be abused in various ways," he says. Government investigators and lawyers in civil suits regularly get court orders to force internet companies to reveal email messages and other personal information about users. Google recently rewrote its privacy policy to make it easier to understand what data it collects, but it did not scale back its data retention. Nor did it, as Weinstein and others have demanded, give users the right to see the data collected about them.

For now, the only personal information Google says it considers is the user's location, which allows it to display ads for local merchants. It is starting to encourage other websites to send it the ZIP codes of their registered users so Google can display ads relevant to their location. Brin says Google will not use the data inappropriately. "I don't think it's a big deal to show opera glasses to someone searching for binoculars that you somehow infer is a woman," he says. "But you don't want to pop up ads for HIV drugs on someone's page, because you inferred they have HIV, when their boss is standing there looking at their computer." To be sure, other websites are far more aggressive in using personal information. Yahoo, for example, will let marketers display ads to users based on demographic information the users provide as well as the users' surfing and searching history. Microsoft's new system for MSN explicitly allows advertisers to bid different prices for clicks from users of different ages, sexes and locations.

In addition to selling ads on its site and sites that use its search technology, Google places text ads on sites published by professional media companies and by amateurs. Created in 2003, this technology, called AdSense for Content, has made advertising on Google more attractive and was the economic foundation for the rise of blogs. Advertisers, meanwhile, have had to scramble to adapt to this completely different approach to buying ads. They needed to find ways to keep track of bids on thousands of keywords, and to measure which ads, tied to which keywords, produced which sales - and then to figure out if they had bid the right amount for the ad.

Many advertisers and their agencies have a powerful love-hate relationship with Google. They find it a meaningful source of leads and sales, but Google has sometimes been hard to deal with. There is a growing sense that a significant number of clicks that advertisers pay for are fraudulent - made by competitors trying to deplete advertising budgets or by websites trying to bolster the revenue they get for displaying the ads. Google says it has technology to minimise "click fraud", but many think the incidence of fraud is not as low as Google contends. Here, as in other places, many advertisers criticise Google for being like a black box, because the company gives them less specific information and control than they would like. Until recently, for example, advertisers could not specify where their ads ran, though they were convinced that some websites in Google's network were much more likely than others to send them customers. Google responded with what it calls "smart pricing" technology that discounts certain ads if Google's analysis shows that they are seen on sites it determines are less likely to produce paying customers. But Google discloses little about how this works, and advertisers find it frustrating. "Google is very opaque and bizarre to deal with," says Joshua Stylman, a managing partner at Reprise Media, a search advertising agency, but he adds that Google has become somewhat more responsive in recent months.

Schmidt addresses those complaints by saying that advertisers are missing the point of Google's new model. It shouldn't matter what Google does with their ads, he argues, so long as the received value, which advertisers can measure, is higher than the price they pay. The entire discipline of media planning may be rendered obsolete - just as Google's automated news website threatens the livelihoods of human news editors. In any case, Schmidt believes that science will replace much of the art of marketing. "I have this fantasy that goes like this," he said at one point. "You are the CEO of a large company, and I come to you and say, 'Give me $US1 million and give me your website, and we will guarantee you will get $US100 million in sales.' Which CEO would turn that down?"

Google isn't quite pursuing that sort of deal, but it is trying to have big retailers link their inventory systems directly to its advertising auction. That way, a toy store chain, for example, could respond to a search for dolls with an ad for Barbies or Bratz, depending on which were overstocked in the store near the user's home. "Most retailers only advertise 5 per cent of their products," says Tim Armstrong, Google's vice president for ad sales. "We can let them advertise all of them." On the other end of the spectrum, Google is trying to focus on what the internet market calls branding advertising - the sort that dominates television and magazines and creates awareness of a product, but doesn't directly call on viewers to buy right away. Yahoo, AOL and MSN have all evolved the simple banner ad into more elaborate units with animation, interactivity and sometimes video formats that have been embraced by national advertisers. Google has convinced some companies that its text ads can help build awareness of their products, even if people don't click on them to buy something. But top executives are also developing a broader strategy for branding advertisements. Google has already allowed its so-called publisher network - sites for which it sells ads - to accept advertising with limited graphics. At first, these were simple images, perhaps with a little animation. It is now moving to accept ads that use the popular Flash technology that allows for more interactivity. So far, these ads have been only a tiny part of Google's business.

Indeed, such ads shine a spotlight on the mental compromise that Brin and Page made when they overcame their initial objections to advertising on their service. Text ads, they argued, were not the normal fluff of Madison Avenue, but useful information . "Advertising was not a business built by logic, and we don't work by algorithm," says Wenda Harris Millard, Yahoo's chief sales officer. "We need to be more accountable, but that doesn't mean you sacrifice art and creativity."

Schmidt acknowledges that as Google explores moving into television, it may well face a conflict between its core belief that advertising must be useful and the typical television commercial that is "based on feeling and emotion." "Our model is likely to affect television last," he said, while expressing optimism that a formula for useful, targeted commercials could be found. For now, he quickly adds, the market for various forms of direct marketing is three times larger than that for television ads. "We are in the really boring part of the business," Schmidt concludes, "the boring big business."

The New York Times