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Tacoda, the well-known ad network company which offers relatively high rates to publishers to place advertisements automatically on their Web pages, is officially shutting down.

The entity, recently bought by AOL, is instead being folded into AOL’s Ad.com/Platform A division. This is a shocking move for some, because Ad.com doesn’t target much at all, and offers ads of $1 or less per a thousand views — and is generally considered a “bottom-feeder” by some in the industry. The company apparently hasn’t communicated very well about what sort of targeting technology Ad.com will offer to the affected customers (see memo below).

[Update: We found it difficult Friday to reach someone at AOL for comment, but PaidContent's David Kaplan has reached Platform A's Lynda Clarizo, and she says Ad.com will be using Tacoda's technology. She says Ad.com was targeting the same way Tacoda was, and thus the implication is that Ad.com was paying as much. But that's not what we've heard from sources. Only time will tell.]

Tacoda became popular because it offered an industry high rate of $2 to $6 per a thousand views (CPM). True, other advertisers often offer far more than that, but not without selling to a Web publisher’s more expensive display ad space — and requiring interactions with live sales people. Tacoda, all automated, paid rates well above other comparable “remnant” networks. It did so by working hard to target behavior of Web users. By knowing what pages users visited online, Tacoda’s technology allowed advertisers to fork out more money, in the knowledge that their ads were reaching the right people.

Valueclick, another player in the area that is similar to Ad.com, announced anemic flat growth yesterday, its shares fell by up to 11 percent as it became clear customers are spending less. Aside from the economic downturn, the pressure may also be due to the realization that low-end ad networks don’t offer a very differentiated product anymore.

The shuttering of Tacoda comes after another move by AOL that raised eyebrows: AOL bought Bebo $850 million, a price many observers considered to be twice or three times what it was really worth, and then let the founder Michael Birch leave — though some considered him one of the company’s crown jewels.

The action is also significant because AOL has been the second largest online advertising player, behind Google.

From what we hear, the Tacoda transition isn’t going very smoothly. Only 35 employees remain at Tacoda’s division, down from 97, apparently because some sales people were unhappy about moving to Ad.com. A letter sent out by Tacoda today suggests publishers will have to sign new contracts, and will have to change tags on their web pages. Letter below.

(Updated, to include precise amount of funding, and reporting about privacy controls NebuAd has implemented not included in the first version of this story)

NebuAd, a controversial advertising firm, emerged from secrecy today to announce it has received $20.5 million in a second round of financing.

Its “targeted” advertising technology is likely to add fuel to the debate about privacy. The service can be used by your Internet service provider to get an unprecedented look at the types of Web sites you visit. While it will bring smiles to the faces of marketers, it may enrage people worried their privacy is already non-existent on the Web.

Targeted advertising usually relies on “cookies” that a Web site places on your browser when you visit it. The cookies can afterwards track which individual pages the visitor accessed. Cookies have a number of limitations, not least their inability to see what a user has done away from that particular website. Technology developed by Redwood City, Calif.’s NebuAd  a different technique called “deep packet inspection,” which can be likened to poking through all the mail that arrives at or leaves your house to get an idea of who you correspond with, and what you tell them. NebuAd offers its packet inspection software to internet service providers, the services you use to access the internet. NebuAd then turns around and provides the traffic information to advertising networks.

Surfers visiting pages with ads from NebuAd-affiliated networks will find the ads more likely to be meaningful to them; a user researching electric cars, for instance, might be less likely to see an ad for an SUV, and more likely to see one for a Prius.

NebuAd’s CEO, Bob Dykes, claims that such targeted advertising is superior to even the best offered today by companies like Tacoda, which collect cookies from all the webpages that connect to a particular ad network. Tacoda was acquired in July by AOL for a reported $300 million. NebuAd’s technology will collect more information than Tacoda’s cookies do. The more targeted the advertising, the more money can be generated — up to dozens of times what an untargeted method might be worth. Under NebuAd’s system, all stand to take a cut of the enlarged pie.

The funding was led by Sierra Ventures. Menlo Ventures, which provided the company’s first $11 million round of funding in May, also participated. Founded in early 2006, NebuAd has about 90 employees.

In an interview with VentureBeat, NebuAd’s Dykes said the company has taken measures to avoid collecting information users are uncomfortable with. For instance, any traffic going to or from websites with pornography or information on illegal acts would be filtered out. NebuAd’s data is also collected in a way that it can’t be used by anyone to identify individual users, even if it fell into the wrong hands, he said. As data about an individual’s Internet behavior flows NebuAd’s appliance, the individual is represented merely as a hash number, he said. It doesn’t know the individual’s name, because it hasn’t asked for it from the ISP.

Privacy advocates, who have long decried even the tracking performed by cookies, aren’t happy with closer scrutiny of surfer’s habits — but are apparently consoled by NebuAd’s promises to keep the information anonymous. Scott Bradner, a technology security officer at Harvard backtracked on an original critique in Network World, in which he called the approach “disgusting.” He now says NebuAd is acting responsibly.

ISPs are also required to mail or email documents to their users asking for permission to track their surfing habits, Dykes said. There is more than one way of going about getting agreements, however, and our concern is if ISPs prefer to simply bury a clause in the inevitable legal agreements that accompany every modern service.

Finally, users will be able to permanently opt-out through a separate NebuAd service called Fair Eagle, assuming they know of its existence. NebuAd, in response, says its opt-out option is obvious enough; it is stated on its Web site.

NebuAd isn’t alone in attempting to pull packet information from ISPs, although it has taken the most funding so far. Vancouver-based Adzilla uses the same techniques, and has so far signed up eight ISPs, according to its homepage. NebuAd, which is scheduled to have its official launch in November, has been testing on several ISPs, but wouldn’t tell us how many.

Now that the deep packet inspection cat is out of the bag, it isn’t likely to climb back in, despite the objections of onlookers. Owners of websites and ISPs will find the technology well-nigh irresistible, if it delivers on its promises of valuable, always-targeted advertising. Advanced tracking also holds promise for ad-supported internet access, which has not yet successfully implemented.

For more information about targeted advertising and ad networks, visit this VentureBeat post, written by contributor Jeremy Liew.

updated

Web portal AOL said it has agreed to buy Tacoda, a company that delivers targeted ads based on a visitor’s browsing habits.

It is the latest move by Web giants to buy up companies that help them boost advertising, and reflects AOL’s move to rely more on advertising revenue amid a plunge in paying subscribers.

The amount was undisclosed, but the NY Post is putting it at $200 to $300 million. [Update: Dow Jones is using the $300 million number, but this is also unattributed, so no firm conclusions yet.]

AOL, the online unit of Time Warner Inc., said the acquisition of Tacoda would help advertisers run more relevant pitches. Visitors who read a lot on new car models, for instance, will find automotive ads following them to Web pages on baseball. (AP has the story here).

Tacoda had raised a total of $33 million of financing since 2001 from Rho Ventures, Union Square Ventures, Masthead Venture Partners and Hanseatic Americas. Union Square’s Brad Burnham provides the back-story, about how Tacoda founder Dave Morgan followed Burnham into a cocktail party in his shorts in order to dog him for money.

Customers include About Inc., BusinessWeek.com, Dow Jones, the Albany Times-Union.com, USA Today and Weather.com.

Venture capitalist Jeremy Liew just wrote a column for VentureBeat noting how niche sites will do well, because of these new targeted advertising technologies.