Global Trend

On-Line Advertising Turns the Corner

Just a few short years ago, before the dot-com crash, any Web site with lots of visitors was thought to be a money machine for advertisers. BlueMountain.com, a greeting card company with 11 million visitors a month, sold for $780 million, even though it had no revenues. But, shortly after the crash, you couldn’t give those eyeballs away, and until recently the industry consensus was that there was little if any value in advertising on the Internet.

All that’s changed now. Eyeballs on the Internet are hot again. As reported in a recent article in Business 2.0, Dow Jones just paid $519 million for MarketWatch.com, and AOL bought Weblogs.com for $25 million. This year, Internet ad spending could top $12 billion and is expected to grow at 12 percent a year for the next five years.

The reason it didn’t work the first time was that the technology simply hadn’t penetrated far enough to change the way people made purchasing decisions. But broadband connections in the U.S. are approaching 40 million, and people with broadband spend three hours a day on-line versus less than two hours a day watching television, according to a Stanford University study.

The big companies are buying Internet ads these days, which is driving a wave of deals in which the big content companies vie for audiences to watch those ads. The New York Times Company bought About.com for $410 million. InterActiveCorp bought Ask Jeeves for $1.9 billion. As we reported in Trend #2, News Corporation bought the parent company of MySpace for $580 million.

Overall, the average price paid for an individual on-line visitor in these deals was $38. In short, companies are doing what they did before the dot-com crash, but hoping that they’ve learned enough lessons to get it right this time.

Another force that has driven this trend is Google, with a 30 percent marketshare of all on-line ad spending, which includes 40 percent of paid search ads. Since the dot-com crash, “Google” has not only entered the English language as a verb but has become a common household tool for finding anything, anytime, anywhere.

Despite this renewed interest, advertisers devoted only about 5 percent of their spending on-line in 2005. But, going forward, you can expect 10 percent to be closer to the norm. In fact, Internet advertising is expected to grow 28 percent in 2006, to about $13 billion, according to Jupiter Research. By 2007, Jupiter predicts that the market will surpass $15 billion.

With this much at stake, it’s not surprising that Google is starting to come under pressure, as other portals attempt to capture some of that ad revenue. Yahoo!, Microsoft, and Time Warner are all putting pressure on the search engine, whose shares have increased by 500 percent since it went public in 2004.

As of right now, Google has 37.6 percent of the Internet search market, compared with Yahoo! at just under 30 percent, Microsoft with 15.6 percent, and AOL at 9.1 percent. But Google also lags behind in tracking its users’ behavior, with Microsoft and Yahoo! leading the field. This type of tracking allows companies to more precisely target their ads and, therefore, to advertise more efficiently.

Because of that difference, Yahoo! is in a position to offer advertisers something Google can’t: metrics that show how effective their ads are. According to the Wall Street Journal, Yahoo! recently struck a deal with Marketing Management Analytics in Wilton, Connecticut, to measure the effectiveness of ads on the site using complex econometric equations. As advertising on the Web moves from search to display, this will become more important, because search is easy to track, while the effects of display ads are not.

More significantly, as broadband speeds increase, the trend will move away from today’s paid search advertising and toward a model that offers the high production values of a television commercial. When that happens, Google’s advantage in search technology may no longer give it such a strong competitive edge.

In light of this trend, we offer the following five forecasts for your consideration:

First, in the next three to five years, traditional media advertising buys may actually contract, as companies flock to the Internet to see if they can make it work this time. Billions will be spent searching for the right formula, and those sites that can prove the effectiveness of their ads will win big. Reliable metrics will be the key.

Second, the Internet ad market is likely to see a big shake-up because Google is so dominant, and yet in such a precarious position. Companies often stumble at the top of their game, and Google is spreading itself very thin with numerous offerings ranging from classified ads to searchable desktops. At the same time, it has numerous competitors applying pressure. Apple, still a dark horse in this race, has the fastest-growing Web site of all, rising 57 percent in the 12 months ending November 2005. In that same period, Google rose only 29 percent. If Apple can parlay these eyeballs into ad revenues, the other sites may be in for an unwelcome surprise.

Third, as more and more advertising is driven to the Web, traditional media will become marginalized. The printed daily newspaper isn’t likely to disappear any time in the near future, but it may look much more like it did in the 19th century. It will become smaller, less influential, and carry fewer mainstream ads.

Fourth, as ad revenues drive technological advances on the Web, passive television will virtually disappear. Content will be driven to the more capable medium of interactive broadband. High-resolution video screens will still form the center of a home entertainment system, but they will be driven through Internet protocol-delivered signals. Content will be on-demand and either pay-per-view with no ads, or free with high-powered interactive ads from major companies.

Fifth, by 2015, a booming market in advertising to hand-held devices will emerge, as targeting strategies and technologies are refined. The race for content for these hand-held devices is already on, and whoever can grab the attention of the 65 million expected users in 2010 will reap huge benefits. In one scenario, mobile phone service could be given away for free, but users would have to listen to commercials. This is similar to the business model deployed by Web sites that provide free Internet services or content as long as the user allows ads to appear on their screens. Qualcomm is already at work building a live TV network specifically for cell phones. And Verizon and Sprint are already offering news and entertainment video clips. The next inevitable step is to sell advertising to go along with those programs.

References List :
1. Business 2.0, December 2005, “The Return of Monetized Eyeballs,” by Om Malik. ⓒ Copyright 2005 by Time Warner, Inc. All rights reserved. 2. To access the Reuters article “Google Exec: 2005 the Turning Point for Online Ads,” visit the ZDNet website at: news.zdnet.com/2100-9595-22-5977658.html 3. ibid. 4. Wall Street Journal, December 16, 2005, “Yahoo to Track Impact of Internet Ads,” by Aaron O. Patrick. ⓒ Copyright 2005 by The Wall Street Journal. All rights reserved.