Microsoft Ad Push Is All About You at the Wall Street Journal has a nice overview of how Microsoft’s behavioral targeting ad software works, nothing ground breaking, but a nice overview. I’ll quote a piece of the article for you:
Here’s how it works: If someone types in “compare car prices” on Live Search, Microsoft’s computers note that the person is probably considering buying a vehicle. The computers then check with the list of Hotmail accounts to see if they have any information on the person. If they do, and an auto maker has paid Microsoft to target this type of person, the computer will automatically send a car ad when she next looks at a Microsoft Web page. As a result, people should see more ads that are of interest to them. “We know what Web sites they have visited and what key words they used,” says Mr. Dobson. “We can deduce what their interests are.” Microsoft says that in testing in the U.S., behavioral targeting increased clicks on ads by as much as 76%.
The rest of the article discusses the competitive landscape.