Beginning in the “Mad Men” era and continuing into the early Internet age, TV networks and magazine publishers sold ad space by persuading advertisers that their audiences included demographic groups likely to buy particular products. In the 1950s, it has been said, 95 percent of the success of advertising agencies came from the creative department, which designed the ads, and only 5 percent from the media department, which paid to place the ads. But the rise of independent media-buying firms has made it possible to identify the individuals most likely to be receptive to ads. This is bad news for magazines and newspapers: once advertisers were able to track and reach specific consumers, they became less interested in where their ads appeared and more interested in who, specifically, was seeing them.

This shift is transforming the economy of online advertising. Google still depends largely on ads tied to search. These are based merely on whatever terms you enter at a particular moment: search for “Hawaiian vacations,” and ads for Hawaiian hotels are likely to pop up on the results page. Such ads, which resemble old-fashioned classifieds, produced a vast majority of Google’s nearly $38 billion in revenue in 2011. On the other hand, only 0.1 percent of all display ads, which are more like magazine ads, with text and images that can appear anywhere, are clicked, according to one estimate.

But as consumers flock to devices like smartphones and tablets, the potential of personalized display ads is making them increasingly popular with advertisers. Since 1994, when Lou Montulli, an employee at Netscape, created the cookie as a way of distinguishing online shoppers, it has been possible to track the activities of individual users on particular Web pages. It wasn’t until the following decade, however, that real-time bidding first used cookies to tag individual Web browsers so that their users could be sent display ads at various Web sites. This makes it possible to build comprehensive profiles of users and then conduct an auction among advertisers to show a display ad to targeted users across tens of thousands of Web sites. Google hopes its revenue from ads that are not tied to search queries will grow significantly. In 2010, the worldwide business in display ads was about $25 billion, Neal Mohan, Google’s vice president of display advertising, told me. But, he added, “there’s no reason that $25 billion couldn’t be $100 billion in a few short years” — as the industry delivers more and more ads to mobile phones, tablets, smartphones and even interactive televisions.

Image Credit... Illustration by Edward del Rosario

When I visited the offices of BlueKai last year, I met Omar Tawakol, who helped found the company in 2008. After studying mechanical engineering at M.I.T., Tawakol went to grad school for computer science at Stanford, where he became obsessed with the idea that data about individual Internet users could be valuable in itself, regardless of where it was collected. “Right now, data looks like black, gooey material,” Tawakol told me at his office in Cupertino, Calif. “Oil was to the industrial revolution as data is to our information economy.” His sense of the potential scope of the marketplace he would help create is reflected in the name he chose for his company: “kai” means “ocean” in Hawaiian.

BlueKai’s customers — which have included travel sites, like Kayak and Expedia, that want to advertise to individual consumers — now track more than 80 percent of the U.S. online population and have created more than 200 million individual profiles based on what we browse and buy online. (By some estimates, there are more than two profiles for every person in the United States.) At the time of my visit, Tawakol told me that over the previous 30 days, BlueKai’s cookies indicated that 38 million people had been to travel sites, and 635,000 of them had plugged in “Hawaii” as a destination. Next, he explained how the BlueKai data exchange then worked. Let’s say you’re planning a trip to Hawaii. You visit a travel site that works with a data intermediary like BlueKai. With the travel site’s cooperation, BlueKai puts a cookie on your computer that records the fact that you have looked up flights from San Francisco to Maui with a seven-day advance purchase. BlueKai’s extensive partnership network enables it to follow more than 160 million people every month who are looking to buy things like cars, financial services, retail and consumer goods or travel accommodations. By sorting users into categories based on our interests and purchasing power — “midscale thrift spenders,” for example, or “safety-net seniors” — BlueKai’s software helps advertisers determine how much each of us is worth following, and at what price. Advertisers for Hawaiian hotels, restaurants, car-rental companies, souvenir shops and so on then place bids starting at one or two cents for each anonymous consumer.

The winning bidder — the Maui Hyatt Regency, for instance — next goes to an advertising exchange, like Google’s DoubleClick Ad Exchange, which conducts a separate auction to determine what the Hyatt has to pay to send you an ad whenever you show up on a Web page that has a relationship with DoubleClick. The Hyatt bids against the entire pool of other would-be advertisers who may not know that you want to vacation in Hawaii and therefore bid less to send you an ad. The automated auction is conducted in real time, which means that as soon as the Maui Hyatt wins the auction, its ad shows up within milliseconds of your loading a given Web page. “What real-time bidding did is to open up a world where the advertising buyer can come in and very specifically, person per person, decide who they want at what price,” Tawakol said. On one occasion after I searched for flights to Maui on Orbitz, the display ad that suddenly showed up at the top of The New Republic home page was for package deals to Kahakuloa Bay.