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I think your last paragraph clearly ilustrates both the scope imposed limitations of the google mail service and its usability.
Give it a thought. To start with, the advertisement was targeted.
If they choose to reply to me, I will see none of the ads they saw. Their email service didn't send me (as a non gmail user) any kind of ads. Since I didn't subscribe to their service, why should I get targeted for their ads?
This in my view is correct.
Second, the email messages contents sent back and forth are ad free. There are no extra lines in the bottom (or top or middle) of the messages. There is no indirect advertisement. Throughout the whole conversation I can rest assured I will never be targeted by gmail advertisement system.
This is also a correct way of doing it, as I see it.
Now... The most important bit. The ad results for the gmail user to whom I replied.
The fact he got 1 out of 10 ads not directly related to the brand being discussed (note it was not Rebook, it was a shoe shop ad), serves everyone. It serves my customer because he will have the opportunity to compare and choose. It serves me because the most of the results and the top results where related to my brand. That is what I payed Gmail to do.
I cannot honestly expect to be the sole result of google ads within the context of my business. The fact that someone named my brand on a message and my brand got 9 out of 10 results and they were the top ones, is much much better than what I get with contracts signed with TV stations and that cost much more. Take for instance a look at how many different brand shampoo commercials you can see in one ad break alone.
I advise you to read the contract you sign with Gmail when purchasing ad space through their system.
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I'm sure the retailer who lost the sale is filled with joy because someone else got the sale and the profit, but the person still bought Nike!
You're correct in saying you can't expect to be the only person out there selling whatever you sell, but it is not unreasonable to expect to be able to communicate privately with your customers without exposing them to a number of your competitors.
Just like you do on the phone, by regular mail, in person and by leaflets/brochures/catalogues.
When a client reaches the stage of entering their email address on a business's site, or contacting the business with an enquiry, they've already gone through the search/see the competitors ads process, and they've made a decision to consider going to or through your business.
The fact that the advertisements are not actually embedded in the email is probably because AdWords uses a spider (program which reads pages to see what's on them) to determine which ads get displayed - and the spiders would simply be denied access to the non-gmail users' email ...
The only way television advertising could be compared would be if tv stations suddenly started doing "picture in picture" of advertisements, showing you the main advertisement + 5 smaller ads running down the side of the screen. I'm sure any tv station game enough to try a stunt like that would find themselves pretty poor, pretty quickly ...
The contract you mention is interesting ... what contract? Businesses need to sign a contract with Google before they email a gmail user? They certainly should. They should be fully informed and aware and consenting to their emails being used to push their competitors ads.
Google should really be auto-responding to every address who emails gmail users making them read and agree before actually allowing email through to the gmail user.
Before you say that's impossible or unfeasible - a very similar process is already done with various anti-spam services.