In the 100 or so years since consumer products pioneer Lord Leverhulme made his famous remark that “half the money I spend on advertising is wasted, I just don’t know which half,” little progress has been made in solving the problem.

Efforts to do so invariably lead to controversy. When it emerged last week that BT had secretly trialled a targeted advertising system without its customers’ knowledge, it brought the issue of web privacy and advertising back into the headlines.

The system, from vendor Phorm, targets adverts based on the type of content found on web sites visited ­ – a controversial area.

It has been closely scrutinised by the Information Commissioner’s Office (ICO), which concluded that the system is legal provided that users choose to accept the ads.

“Phorm products will have to operate on an opt-in basis to use traffic data as part of the process of returning relevant targeted marketing to internet users,” said the ICO in a statement.

Currently there are two broad models to choose from in targeted online display advertising.

The first ­ – pioneered by Phorm ­ – analyses a web user’s behaviour over a long period of time and categorises them as a particular demographic to which adverts are then targeted. Users remain anonymous, claims Phorm.

The second ­ – a model being used by Google’s DoubleClick, Yahoo’s AMP and Microsoft’s aQuantive systems ­ – places cookies on a user’s machines and targets adverts on a shorter-term basis based on web sites the user has visited recently.

Both approaches are controversial and have their drawbacks in terms of privacy. It is early days in the targeted advertising business, and a clear leader has yet to emerge, but Phorm is a newer system, according to Forrester Research analyst Rebecca Jennings.

“The issue with Phorm is it still has to encourage people – ­ including ISPs ­ – to sign up to it, a challenging task with some of the press it has been getting,” she said.

“Google’s and Yahoo’s systems are already trusted names and have established networks.”

Legality is an important issue, but businesses looking to advertise on the web need to look beyond whether a system they use for advertising breaks the law or infringes the privacy of potential customers.

Intrusive advertising can have a significant negative impact on a brand, as the overwhelmingly negative reaction to Facebook’s Beacon release ­ – considered to be overly intrusive ­ – showed last year.

Internet advertising is an exploding market with spending rising 38 per cent to £2.8bn this year, according to Guy Phillipson, of the Internet Advertising Bureau.

“With broadband speeds on the up and consumers spending more time on more sites, the outlook for online advertising is rosy. In fact, we expect it to overtake TV in 2009 when it will become the UK’s biggest medium,” he said.

The key to successful online advertising is choosing a service which achieves the right balance between privacy and relevance.

Jennings believes the issue is one of risk and reward. “Targeting does not necessarily put a user off ­ – indeed, it can be beneficial ­ – but it needs to be done carefully,” she said.

“A few huge companies are moving into this space but the market is still young ­– whoever gets the targeting balance right stands to make a lot of money.”

Whichever system a business adopts, both offer a new form of co-ordinated web advertising across display, search, video and mobile which will help drive the exponential growth in the online ad
section.

In such a large market there is also space for smaller advert brokers, some of them perhaps better suited to smaller firms looking to advertise online, according to Gartner vice president Andrew Frank.

“We’re seeing more and more ad networks, and new and innovative companies might be a better and cheaper choice for companies which want to target a particular market,” he said.

As with the larger advertising networks, the companies which target effectively without being intrusive will be successful, said Nate Elliott, research director at Jupiter Research.

Smaller companies are unlikely to be as controversial.

“These companies focus more on niche markets and so their targeting is often better, because they tend to put more research into the type of web sites visited,” said Elliott.