Megan McArdle has an interesting post on the future of the media where she brings up what I think are two very important points.
First (and probably most importantly), she notes the reason why the Internet advertising isn't much more targeted than print advertising:
In theory, the web allows heretofore undreamt of targeting ability. In practice, privacy concerns and fear of regulation have held it back.
This is a very important point about privacy that is often missed in media coverage of privacy legislation and supposed privacy breaches (see: Beacon).
And secondly there's this:
And Felix is right on when he points out that for a long, long time, articles on swinging into spring with patent leather have been subsidizing coverage of less-popular-yet-more-vital topics like foreign policy and the Department of Agriculture. The web is rapidly disaggregating the readers, and hence the subsidy. And that's a big problem for society. One for which so far, no one has proposed any very satisfactory solution.
This answer should be obvious: readers of these "high brow" stories are also wealthier readers, and thus are theoretically worth more to advertisers. Of course, only if the paper (and its advertisers) know where these people live and a little bit more about their preferences can they actually monetize these hits.
So basically, it all boils down to the government giving up its job as privacy monitor, and trusting that its citizens can make appropriate choices about who they give what information. Backlashes against the most egregious offenses ("Your friend Jake just bought X – would you like to purchase this too?") would weed out the obviously undesirable advertising, whereas tacit acceptance would allow the non-offensive type ("Some of your friends have bought X – would you like to purchase this too?") to fund newspapers and other online content.
Not to mention that consumers would likely be pleased to see advertising for things they'd actually buy – what's more annoying and useless than watching ads for things you don't want?