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While content engines have been around for a while, their growing presence is influencing how readers explore the web. They are also taking on a new importance as vanguards of “native advertising,” a trend that many hope will reinvigorate the online ad economy.

Here’s an overview of the content engine industry and what it means for publishers, advertisers and readers. (To learn more about the latest publishing strategies, be sure to attend paidContent Live, April 17 in the New York).

Keeping readers close to home

New York magazine uses a variety of tactics to increase visits to its website and to induce readers to stay on the site. These include boxes showing its most-popular stories as well as cross-promotion arrangements with other news sites.  New York has also recently signed on with content engine nRelate, which uses algorithms to display other stories a reader may find interesting; the stories come from New York’s own site or one of its affiliates.

nRelate promises publishers more pageviews but also a new revenue stream as a result of “sponsored stories” it inserts in the list of recommended content – if a reader clicks on the advertiser’s “story” (typically a promotional article written like a news story) the publisher and nRelate share the money.

Michael Silberman, the GM of digital media at New York, says he welcomes the chance for extra revenue but that the main purpose of the nRelate experiment is to get readers to stay on the site. And, like so much in publishing these days, the outcome will be data driven. “We’ll do A/B testing to see if there’s an overall lift. If all it does is redirect traffic we would have had anyways, it’s not worth it. If it leads to more pageviews per visit, then yes,” said Silberman, adding that publishers have to take care that tools like nRelate don’t clutter or slow down the site.

Tools like nRelate promise more money or traffic but they also represent a growing strategic importance for publishers. The reason is that, in age of the social media, fewer and fewer readers arrive at a website directly through a publisher’s home page; this means that publishers are doing more than ever to persuade them to stick around.

“We find [Outbrain] quite useful as a tool to drive traffic to our sites and circulate traffic through our sites.  The numbers suggest that our users find it useful as well,” said John Lerner, CEO of Breaking Media, which owns sites like Above the Law. (see screenshot at right). He did not provide specific numbers.

Meanwhile, the content engines are also a source of money. Joshua Albertson, the President of Curbed Media, says in a good year, they can bring in six figures of revenue through its sites Curbed, Eater and Racked.

Rivals collide on a new advertising frontier

While tools like nRelate hold promise for publishers, they’re also being pitched as a way for advertisers to break through to readers who tune out conventional online ads. The idea is that, by packaging the ad as a story to “read next,” a reader is far more likely to click on it and digest the marketing message.

This ad format – call it “native advertising” or “content marketing” or whatever you wish – has produced a growing list of companies that want to serve up sponsored stories. The biggest of these is Outbrain, which has already received $64 million in funding and claims to be on more than 90,000 blogs and websites like Slate, whose editor, David Plotz, says he has been pleased with the three-year partnership.

“We’ve been really happy with it. We needed to provide related links and Outbrain combines it with a tool that makes quite a lot of money for us.”

Outbrain’s hold on the market is far from firm, however, as competitors have been peeling away some of its clients. According to Curbed’s Albertson, the company decided to switch after it found Outbrain’s performance declining and rival Taboola offered it a bigger share of advertising revenue. Here is a screenshot of Taboola, which serves both stories and video and recently received $15 million in new funding:

As the rivals move in, Outbrain has begun slapping its logo on its boxes of recommended stories in an effort to be seen as a brand. It also recently fired a quarter of its advertising clients because of the poor quality of their story content. The company explained the decision this way:

“If companies coming into this space are not respectful of the audience who are clicking on these links, then the user trust will decline over time. That means this space — which is currently so valuable to the audience and publisher — will be just like the the display ad market. People will become ‘content link blind,’ just like they became ‘banner blind.’”

Meanwhile, other companies are pivoting from their core business to get into the content engine game too. These include dictionary company Reverb, which believes its experience with syntax will make it good at finding content, and the commenting platform, Disqus.

In an interview, Disqus CEO Daniel Ha said the company has an advantage due to its existing relationship with thousands of publishers, and the ability to offer brands a way to reach hyper-engaged comment communities. Ha added that the Disqus strategy is based on the “independent web” and “the middle-tail of websites,” pointing to examples like a Toronto Maple Leafs fan forum and coupon site Southern Savers.

A boom or a bubble?

Content engines may be a hot topic but is there enough money and web real estate to go around? Neil Mody, the CEO of nRelate, says there is not. “There’s a classic network effect. You’ll get one big winner. Numbers two through five will do OK. Numbers 6 thru 20 will go niche or fail.”

Mody says there is already evidence of a coming shakeout. He claims some content engines are paying publishers to get on their sites even though they have no ad revenue. He also says the industry is over-capitalized and that there is risk of a backlash as some content engines flood the space with junky “lose your belly” type of articles.

Another challenge for content engines is the low cost of switching for publishers. The engines are built so that it’s easy for publishers to put them up, but also take them down — a situation that doesn’t favor long-term relationships. The result is that publishers can simply sign up with whomever offers the best content or most money. This means the winner is likely to be content engine with the best algorithms and the highest quality advertisements.

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Taboola founder and CEO Adam Singolda said the company will use the funds to fuel growth and expand internationally. Taboola now works with 1,000 sites, and the company claims it serves over 1.5 billion recommendations a day and that 200 million people see Taboola recommendations every month. 70 percent of that traffic comes from the U.S.

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While Simon & Schuster has placed particular emphasis on online video, other publishers are also using it as a promotional tool. Reading community site Goodreads has its own video section, and website Book Riot has a separate section for book trailers. Readers and fans have come to expect “readily available and entertaining information both about their favorite authors and those they’re considering reading,” said Simon & Schuster EVP and chief digital officer Ellie Hirschhorn. “Video is now a critical part of that mix.”

Since many web users search for topics, not individual titles, Simon & Schuster has created three video channels that will appear on Roku and Blinkx. Two of the channels, “Tips on Healthy Living” and “Tips on Life and Love,” focus on videos from lifestyle and relationship authors (and have corresponding blogs), while “Book Stew” features author interviews for pop culture and general interest books.

Hirschhorn said Simon & Schuster’s most popular videos have been Walter Isaacson speaking on his book Steve Jobs (13,562 views on YouTube) and a book trailer for Hunger Games parody The Hunger Pains (over 1.5 million views on YouTube). The most successful videos, she said, provide “entertainment that is not an advertisement,” and tend to be under two minutes long.

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The round is led by New York-based Marker LLC, with existing investors, including Evergreen Venture Partners and WGI Group, also contributing.

According to  Adam Singolda, founder and CEO of Taboola, much of the new funding will be invested into infrastructure, which is needed, he says, given its increasing technological demands.

The data centers behind the company’s widgets are now up to processing around half a billion recommendations a day to its clients’ readers, showing them “related videos” or “other videos” they might like, Singolda adds. And its trying to extend its reach across mobile platforms.

Taboola is headquartered in New York, but keeps one of its two data centers in Singolda’s home country, Israel. Taboola’s recommendation widgets appear on the pages of more than 300 publishers. It claims it have more than 150 million unique users a month across its publisher network, 80 million of them in the U.S.

Founded in January 2007, Taboola has now raised $25 million.

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According to data from Quantcast, Taboola has reach of more than 110 million unique visitors a month. Of those viewers, more than 65 million are in the U.S. alone. As a result, Taboola generates more than 300 million recommendations every day, CEO and founder Adam Singolda told me by email.

While Taboola, which provides a widget for recommended videos, has traditionally been used by news publishers like the New York Times who are trying to expand their available video inventory and advertising revenues, it’s been tapped by two new partners in the live streaming vertical. Ustream and Major League Gaming now both make Taboola recommendations available to their viewers.

With the move to provide recommendations for live streaming viewers, Taboola has had to add capabilities beyond just the contextual targeting that it typically uses to match up video recommendations for users. Because videos are live, the recommendations engine doesn’t have as much data to go on. So Taboola is providing recommendations based on behavioral targeting while viewers are watching live streams.

Outside of the live video market, Taboola has also added new partners. Those include BusinessWeek, The Washington Post, Food Network, The Hollywood Reporter, Daily Caller, Ask Men and Gannett’s Navy Times. With some of those publishers, the Taboola video widget is on every page of their websites.

As publishers try to expand their use of video, they need ways to highlight the content that they’ve produced. Taboola can not only provide recommendations, but can also expand the amount of video available to viewers by recommending those from other publishers and sharing revenues between them.

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Taboola provides a widget to publishers that provides recommended videos based upon the context of the story being read. Those videos can come from the publisher whose website an end user is on, or from multiple other providers that have agreed to make their content available as part of Taboola’s network. The website gets additional content from other providers, while the content creators get additional viewership opportunities from being seen on a wider range of publisher sites.

Now it’s taking that concept a step further, with the ability to have sponsored placement in those widgets. Publishers can now pay to have their content highlighted among the recommended videos, as a way to increase viewership from outside sites. While those videos are still recommended based on Taboola’s targeting technology, they are clearly marked as sponsored content.

Taboola is offering the model on a pay-per-click basis, meaning content owners don’t pay for a video’s placement unless someone chooses to watch it. It’s a good way of ensuring the videos shown are relevant, and that content creators don’t get charged based solely on impressions. Taboola then shares a cut of the revenues from sponsored videos with the publisher whose sites they ran on. (For a good example of this in practice, check out this local Hearst affiliate, which is offering recommended videos at the bottom of the page — including sponsored content from other providers.)

In addition to its most recent product addition, Taboola has also been making some progress in expanding beyond the U.S. market. Domestically, it powers video recommendations for clients like the Bloomberg, CNN, Hearst, the New York Times and USA Today, but it has obtained some top international customers as well. Those include Agora in Poland, Esmas in Mexico, IG.com in Brazil and Ynet.co.il in Israel.

Taboola wants to expand even more internationally, and CEO Adam Singolda told us he is looking to add more salespeople outside the U.S. The startup, which has offices in New York and Israel, recently raised a $9 million round of funding led by Crescent Point, with participation from Evergreen VC. To date, Taboola has raised $15 million since being founded in 2007.

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Taboola makes it possible to add widgets to a site that showcase context-relevant video files. This enables publishers like the New York Times  or Hearst Television that have large stores of video and web pages to automatically display relevant video files without having to hand select them for each new story.

But Taboola has found some of its clients want more control over the videos that appear, so the company has created new editorial capabilities to refine recommended videos. This includes the ability to promote a video ID or meta-tag, enabling publishers, for instance, to promote a video for a certain period of time. Customers can also configure the tool to promote different types of videos depending on their placement. One example of this would be enabling them to set recommendations so viewers only see videos from the last few days on a site’s homepage. Finally, publishers can remove videos that they don’t want to promote for whatever reason.

The tools are designed to create a better user experience for readers and video viewers, possibly by surfacing newer videos and more editorially curated selections. But because providing a better user experience doesn’t always jibe with showing the video a viewer is most likely to click on, these changes could affect click-through rates for publishers and provide Taboola with an even bigger algorithmic challenge, CEO Adam Singolda wrote to us by email.

“Instead of working on improving our CTRs [click-through rates], we now need to be even better algorithmically as we are offering publishers editorial-friendly tools that allow them to adjust our system in real-time, which could potentially decrease CTR,” he wrote.

In addition to its new editorial tools, Taboola has added new members to its senior management team. It’s added Yarden Tadmor as chief revenue officer and Ira Silberstein as its SVP of client services. Prior to Taboola, Tadmor was SVP at Dapper, which was acquired by Yahoo for $85 million , and also CEO of LiveKick. Silberstein, meanwhile, was VP of product at the New York Times before joining Taboola. The startup also added David Noy, former head of Product at MetaCafe to be its VP of Product.

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Last week, when sifting through my daily readings, I found myself reading a post by Adam Singolda, the founder and CEO of a New York-based video recommendation company, Taboola. Singolda had started the company after spending seven years in the Israeli Army. In his article (and a presentation he gave to students at MIT’s Sloan School of Business) he talks about The Economics of Good Enough as a business mantra and the lessons he learned from taking that approach. Those lessons boil down to this:

• Succeed with what you have.
• Failing is a part of the process, not the end of it
• Golden moments don’t exist. “Just do it”
• Creativity. New world requires new tools
• Networking. Not as rolodex but to create opportunities.

What many don’t realize is that today’s always-on economy has an entirely new dynamic that involves an always-on, anywhere customer, unpredictable demand, and — most importantly — the limited attention span of customers. Add fierce competition to the mix, and what you have is an unpredictable and highly chaotic marketplace. And what that means is that today’s company – regardless of their business focus — has to have a much higher metabolic rate. It grows faster, and fails even faster. Against such a backdrop, one needs to break down one’s business into many small chunks.

“I constantly manage challenges and crises on an 80/20 rule [also known as the Pareto Principle], asking people to get to something, and then to make it work rather than analyze the entire task and then get going, (i.e. the economy of good enough) if it makes sense,” Singolda explained to me in an email later. Now, none of this is that new — except that these guiding principles dovetail nicely with today’s network-driven economic realities.

As an entrepreneur, I can totally relate to Adam’s lessons. In five years of building GigaOM, one of the biggest lessons has been embracing the idea that sometimes things don’t work out as planned and it is okay to move forward. Adam, in his MediaPost column, writes:

Most of us by nature are tuned to plan “the win,” how to behave when winning, how to defend our business when we are there, market size analysis to make sure it’s a billion dollar market, etc. However, in the “economy of good enough,” we are likely to have many little failures and unknowns as an organization and it’s much more important to get ready to the next failure instead of the next win. Statistically it will happen much more. By doing that, you’re building a culture that embraces trying, data collecting, and optimizing.

As I often say, start-ups are a marathon interspersed with 100-meter dashes. One of my fatal character flaws is that I only believe in running at full speed. I don’t know how to pace myself, moving always in the top gear. Well, that kind of drive can sometimes be fatal, especially if you are out of shape and have a whole score of bad habits. I think we as founders of companies sometimes forget that running full tilt can basically get in the way of differentiating things of minor consequence and those that are vital to the future of company.

Even today, despite learning and adapting, it remains a constant challenge. Another personal challenge has been becoming more decisive and learning to live with decisions. So when Adam says there are no golden moments, I kinda know what he means — startups don’t have the luxury to procrastinate over decisions for too long. The faster the decision-making process, the faster you move. And even if you make a bad choice, one needs to be able to quickly modify.

PS: If you want to share the lessons you have learned as an entrepreneur, drop me a note at omsays at gigaom dot com.

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Taboola’s widget uses contextual analysis and other targeting methods to serve up video content relevant to the story a user is reading or a video she is watching. By doing so, the technology auto-curates content, ensuring the media companies in question don’t have to manually add relevant videos to the page. That solves a problem, especially for publishers with a large number of video assets, like local news stations, in providing the right video for a certain topic.

The name of the game is building user engagement — once users are on the page, keeping them there — and increasing the opportunity for video advertising. For readers of text-based news stories, adding a related video component can dramatically increase time-on-site metrics. And for those already watching video, ensuring other related videos are highlighted can provide more chances for advertising.

Other Taboola clients include CNN, the New York Times, USA Today, Bloomberg and Demand Media, among others. The company, which was founded in 2007, has raised $6 million over two rounds of funding and now has 30 employees in offices in New York and Israel.

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