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PALO ALTO, Calif. (Dow Jones)--A potential shift in how online advertising is sold and billed has advertisers and Internet companies scrambling to understand its full effects.

A new method, called cost-per-action advertising, allows advertisers to pay only when an ad leads to a product purchase or sales lead. This differs from the current system, in which advertisers pay when a consumer clicks on an ad, regardless of whether the person performs a function. Cost-per-action, already deployed on a small scale, is seen as reducing click fraud and providing advertisers with a better way of ensuring an ad's success.

It is unclear how much of the Internet advertising market will head to a cost-per-action model, but the three main search engines - Google Inc. (GOOG), Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT) - are investigating how to implement such a method. However, advertisers and the Internet companies are approaching cost-per-action with caution. Internet companies worry about maintaining their growth because the revenue from a cost-per-action campaign could be less, and advertisers face the thorny prospect of turning over proprietary data to prove a sale or action took place.

"Clients are not breaking down our door," says Robert Murray, president of the search marketing firm iProspect.com Inc. "It's early days."

Nevertheless, the impact across the industry could be far-reaching. Many advertisers welcome cost-per-action, saying it lessens the risk of placing ads. Companies pay higher ad rates, but the greater efficiency of paying only when an action takes place can lower overall costs.

"It's the ultimate in marketing," says Pinny Gniwisch, marketing vice president at the Internet jeweler Ice.com. "You know what you're paying (for an action) beforehand."

The speed at which cost-per-action ads reach the $12.5 billion online marketplace may depend on how fast Google, Yahoo and Microsoft's MSN begin offering placement options. Advertisers aren't yet convinced companies will want to dedicate lucrative Web pages now selling cost-per-click. The present system, they acknowledge, better shares the risk between advertiser and publisher.

But executives in the cost-per-action business say the market is expanding rapidly and interest among advertisers may force the issue.

"We think that's where search is going to go in the next years," says Tom McGovern, chief executive of the recently launched cost-per-action startup Snap.com of Pasadena, which was founded by Internet advertising pioneer Bill Gross. "I think a large portion of it" will be cost-per-action.

One justification is that cost-per-action significantly reduces click fraud, which by some estimates is a nearly $800 million annual problem. No longer would phony clicks lodged by competitors or publishers drive up an advertiser's costs.

Another reason is that sophisticated advertisers already calculate the cost of ad campaigns by counting up the product sales or consumer leads they generate. For advertisers, 42% track the success of online campaigns by measuring some form of customer action, even if they don't yet pay on a per-action basis for their ads, says Emily Riley, an analyst at Jupiter Research. The shift to buying by the action instead of the click would be simple.

"Slowly but surely advertisers are increasing their sophistication in terms of measuring the performance of their campaigns," Riley says.

The interest in cost-per-action is indeed expanding enough that the big search engines are taking notice. Google started a cost-per-action test program in mid-June, and both Microsoft and Yahoo say they are paying attention.

The Google test is still small - fewer than 30 publishers and advertisers are involved. The company says ads are being placed on third-party sites, not on search pages, and that the goal is to sell them at auction, the way cost-per-click ads are sold. The tests are still at an early stage, says the company, which declined to comment on their progress.

Advertisers involved in them don't yet appear to have drawn hard conclusions one way or another about the experiment, though some complain the test isn't yet producing enough "actions," according to two people familiar with participating companies. It is hard to see how the Google network of publishers brings in enough product purchases or sales leads to justify the campaigns, says one of them.

More broadly, advertisers across the industry also seem to still be evaluating cost-per-action advertising. The ads have seen a resurgence of use on the Internet in the past year after an initial burst of activity in the late 1990s but, by some measures, still make up about 10% of Net ads today.

One holdup is that, in order to work, cost-per-action ads require advertisers to supply sensitive information about product sales and lead generation to publishers so the ads can be properly billed. It is proprietary data they are reluctant to disclose.

"Clients (also) have to get better at understanding what the action is worth to them," says Karen Vogel, chief executive of the marketing consultants ClearGauge. This will take some time.

Internet companies clearly see a changing market ahead. At Microsoft's MSN network, cost-per-action "is certainly something we're considering," says Jed Nahum, a director of product management. "I do believe it is part of the future."

Within two to three years, advertisers will be familiar with it and many will use it, Nahum says. Microsoft already allows some cost-per-action advertising in a non-guaranteed ad placement program called MSN Direct Response.

New technology that Yahoo is deploying next quarter also will be able to handle cost-per-action, says Gaude Paez, a spokesperson. "It's something we're looking at."

For some advertisers, cost-per-action already has arrived. Dave Osman, a vice president at cost-per-action marketplace Commission Junction Inc., a division of ValueClick Inc. (VCLK), says he has 50,000 publishers signed onto an advertising network and 1,500 advertisers, including companies such as Hewlett-Packard Co. (HPQ), eBay Inc. (EBAY) and Home Depot Inc. (HD). Commission Junction is seeing growth in ad volumes, Osman says.

"I think you're going to see a demand shift of dollars over the next few years," says Jim Barnett, chief executive of advertising startup Turn Inc. of San Mateo, Calif., and the former chief executive of search site AltaVista.

For such established companies as Google, this transition could pose risks, especially if cost-per-action ads prove significantly more accurate and reduce campaign costs.

"It's going to be a major shift in the market (and) it will be highly disruptive to major players," says Barnett.

-By Mark Boslet; Dow Jones Newswires; 650-496-1366; mark.boslet@dowjones.com