Dave Winer blogged the other week on the death of online advertising, and I must say, I agree with him... mostly. In the long run, online advertising as we know it is doomed, for a very simple reason. People put significant effort into blocking ads on the web, filtering spammy emails, and skipping commercials on TV. When your business is centered around showing people things they don't want to see, you aren't going to stick around very long.
At its core, advertising is a surprisingly inelegant solution to a fundamental problem of capitalism. Let's say businesses A, B, and C sell purple widgets. When you want a purple widget, how do you know who to go to for it? The solution advertising offers is for each company to tell everybody, "Hey! Purple widgets!" This has a couple of problems. First, it's inefficient; the majority of people don't want to hear about widgets of any sort. Second, and more subtly, if business C decides not to advertise, and lowers prices instead, the market will punish them despite their lower prices. On a fundamental level, that's not how we'd like capitalism to work.
Google has a really interesting alternative to traditional advertising going on. The basic premise is, instead of telling people about your product ahead of time, only tell them when they're actually looking for something. This is a really neat idea, but unfortunately, it only works well when you've got a near-monopoly on search, like Google has. Google also does a lot of traditional advertising as well; I'd be really interested to see their hit rate for both types of ads.
Even so, the idea has a lot of room to grow. Imagine this fairly common scenario: you want something, but you have no idea what stores would have it in stock. You go to your friendly neighborhood search engine, and it comes back to you with a list of stores near you with that item in stock, along with prices. For bonus points, it could also show only stores that are open at that moment, and give you directions too. Google seems to be about halfway there, with Yahoo not too far behind. The only missing piece left is a big database of what stores actually have on their shelves.
When (not if) that becomes a reality, traditional advertising will take a hit. When people can find the same information they get from ads more easily, advertising will end up being less profitable, and we'll see less of it. I, for one, welcome our new on-demand advertising overlords.