SEOMoz.org has a great write up of the contextual ad session at this year’s Search Engine Strategies conference in San Jose. The post includes some really good case study data that shows how conversion rates differ between contextual and search ad placements.

Low user conversion rate is perhaps the biggest issue facing any kind of contextual display ad product. Even the most relevant contextual ad placements have dramatically lower user conversion rates due to the fact that the ad placement is divorced from the user intent that is created when someone uses a search engine. It is the fact that a user has typed a query into a search box that creates the qualified commercial intent that drives the high performance found in search advertising campaigns.

The lack of search user intent and lower conversion rates lead advertisers to pay less for clicks coming from contextual ads. This in turn leads to publishers making less money from these ad placements, which in turn will lead to fewer contextual display ad placements over time.

This all is well known among search marketing product managers, which is why you see Google, Yahoo! and now MSN bundling contextual placement with their search campaigns (which have much higher bids) as a default setting. Sure, one can un-bundle the two but that extra step generates millions in extra profit for the search giants before most advertisers figure out what’s is going on with their conversion rates.

Despite this, contextual display ad products like Google AdSense continue to live on. This is largely because there are really no other alternatives for publishers that have large scale or “long tail” web content sites.

That’s all about to change.

Watch this blog.