A few months ago Google started distributing their AdWords advertisements that are normally found at the right side of their search results (for more on AdWords see http://adwords.google.com or our AdWords Review). This distribution was based on CPM rates and was limited to sites serving more than 20 million impressions a month or to ad networks like Burst!Media, TribalFusion, and Fastclick. Last week Google launched a new service called AdSense that expanded on this distribution program and made it more accessible to smaller publishers.
This new program differs from what is now "AdSense Premium" in that it is CPC based and for the time being there is less flexibility offered as far as creative sizes go with only banners and skyscrapers being offered currently. Publishers can apply for an account, or if you have an AdWords account already you can simply apply using that account, and you will be notified, usually within a day, if you have been accepted or not. They don't have any really strict criteria for site acceptance, unlike other ad networks they do not have minimum traffic requirements. The only real requirements are standard acceptable content requirements you'll find just about everywhere. They also of course want quality content sites. They will only allow you to serve one ad per page, so you can't use Google for both banners and skyscrapers.
Once you have been accepted you will be able to run AdSense advertisements on any site you own using the same ad code, so long as you obey the guidelines. Reporting is not done in real time, but is updated regularly throughout the day. You also cannot currently view reports based on domain or site if you're running ads on more than one site. Google included a very length and detailed FAQ on their AdSense site, if you're thinking about signing up I suggest you read it.
Google uses their search engine ranking technology to decide what ads to show on your site, and on specific pages on your site. For instance on a webmaster site an article about Flash might show ads for Macromedia products and an article about web hosting might show ads from different web hosting companies. This type of targeting is very effective and results in good click-through rates in most circumstances.
This targeting isn't perfect though. One issue is that Google seems to be doing very little in the way of ad rotation. If a certain ad is highly targeted to your content it might be shown every time. This means that if you have a lot of return visitors or a high number of page views per visitor you may experience declining click-through rates.
Another issue is that Google targets ads based on your site's content, not based on your visitor's desires. The difference between the two might not be readily apparently, but it can be very significant. For instance one of the sites I run is a literature site with information on classic books and their authors. Google will analyze my content and serve appropriate advertisements, for example on my Shakespeare page you may see ads for Shakespeare audio books or limited edition prints. The problem with this is that while those ads fit my content they do not fit my visitors. Most of my visitors are students doing research and they simply aren't interested in buying those types of things. In contrast advertisements for essay sites or other homework helping services do very well on that site. However, unless an essay site owner specifically selects a keyword like "Shakespeare" in their AdWords account then visitors to my site will not see any essay advertisements.
In pondering this situation I was reminded of a company called TeknoSurf Adwave, you might remember them - they eventually turned into Advertising.com. Their original claim to fame was that they were a CPC only ad network yet what they would do is they would analyze what banners performed well on your site and then optimize what ads they were serving in such a way that even though you were serving CPC ads your CTR would be high enough that you would make an effective CPM comparable or better than CPM rates offered by other ad networks.
If Google could implement such a system as TeknoSurf had they could greatly increase the effectiveness of their AdSense program. One glaring problem though is that currently AdWords advertisers specifically select which keywords they want to be served under. For Google to do this they would have to provide an option to AdWords advertisers which would allow them to opt into a program where Google would try to place your ad on the most effective keywords.
So going back to my literature site example, if one advertiser tries serving essay advertisements on the "Shakespeare" keyword and the ads did very well on my site Google would remember this and compare the text of the ad to the text of other AdWords ads and would run similar ads on my site and see how they did. In this way Google would be constantly learning what performs well on your site and what does not. After you have been with them for a while they would be serving ads that should be tailored to your visitors, and not your content. Thus CTR rates would improve, both Google and the publisher would make more money, and the advertiser would get more targeted traffic.
Google is as of yet doing none of this, but the program is still very new. I can only hope someone from Google reads this and takes my suggestions to heart.