Investors in dot com businesses just don't understand the reliance placed upon advertising. Too many B2B (business to business) and B2C (business to consumer) projects rely on advertising for at least one component of their overall revenue programme. With the fall of the dot coms early this year came reluctance from investors to permit expensive campaigns and splashy TV ads. Although much of that excess could be blamed on an irresponsible allocation of investment resources by start-ups, they still constitute the majority of advertisers on major portals such as Yahoo. Yahoo, AOL and a handful of other portals between them manage to take a 70% share of the entire online advertising spend.
The changing nature of advertising
Long gone is the need to scope demographics before deciding on ad placement. In the new economy, advertisers have instant access to information that allows them to know, and with the kind of accuracy never before possible, who's going to see the advertising, how many times it is viewed, and even specific data on how effective it is. Largely because of the electronic nature of the medium, systems are even capable of knowing background on the user before the banner is displayed!
Making an impression on surfers
Some of the biggest players in the online advertising industry, such as 24/7 Europe and DoubleClick, are delivering impressions-based advertising to the largest and most trafficked websites on the Internet today. Impressions-based advertising is measured and charged in CPM (cost per thousand displays of an ad) and is still the predominant form of advertising on the Internet. The problem is that it's very expensive for advertisers and the cost is justified only with gains made in the area of "branding" -- which although considered important, is losing momentum as investors look for short term gains. According to Nielsen Net Ratings, for every 1,000 banners that appear online, only 3 get clicked on by surfers. That's a CTR (click through rate) of about 0.3%. Do the maths and you get a taste of where those incredible statistics, on how dot coms spend so much and earn so little, come from.
CPMs continue to soften
A recent advertising report shows that rates have fallen considerably over the last few years. The average CPM was $37.21 in December 1997 and fell to $35.13 by the end of 1998 (Source: OAR). Average rates slipped four per cent in 1999 (Source: Engage Technologies AdKnowledge) to an average of $33.75 by the fourth quarter and this was despite the fact that the number of sites seeking to advertise grew 135 percent. The growth of results-based advertising over recent months will probably lead to an even steeper decline in CPMs over the coming year. Add to this the fact that there is always more inventory (advertising space) available than can ever be purchased -- resulting in strong downward pressure on ad rates.
What else is there?
Companies such as ValueClick, AdFlight, PennyWeb, Advertising.com and ClickTrade offer advertising at a cost per click (CPC) rate. It is considered results-based advertising because instead of paying upfront for every single display of an ad banner, advertisers only pay when someone clicks on it. This way they get impressions (displays of their advertising) for free. Cost per click is a growing model on the Internet and is enjoying a huge resurgence at a time when a large number of search portals are adopting cost per click models. However, the real buzz today is about the sharing of revenue.
Enter affiliate marketing
Affiliate marketing is about as results-based as you can get. Online retailers, for example, pay only for banners that result in a sale; or rather, they pay only a proportion of the money generated by the sale. This model is also referred to as "associate programmes", "revenue sharing" or more recently "cost per acquisition" (CPA). It's great for advertisers because unlike CPM (cost per thousand impressions) and CPC (cost per click) the CPA (affiliate program) banners are paying only for the ultimate sales success of a campaign -- with clicks and impressions thrown in for free. Advertisers love this model because they're able to flaunt their brand with a theoretical zero risk and they don't have to worry about conversion rates because they only pay up if they make a sale. Even then the referring website only earns a percentage, in most cases of the profit.
Retailers like Amazon.com, which are widely credited as having pioneered the original affiliate program, have been using them for years but they're only just starting to gather momentum in Europe. Thinking of investing in an online retailer? Keep an eye on their affiliate program -- a recent study by Forrester Research of 50 US retailers showed that 13% of revenues came from affiliate programs. Forrester says that this is likely to rise to 20% over the next few years. Forrester also believes that 50% of all online advertising will be performance-based by the year 2003.
Intelligent methods
The industry is under intense scrutiny at the current time as major advertising networks gather "user profiles": information they use to get closer to their dream -- which is to target their market with pinpoint accuracy. Advertising networks such as DoubleClick and Sabina are reported to be using methods such as these. Advertising.com, a US-based advertising network, uses a proprietary technology called Adlearn to find out where a user has been surfing and to build a profile of this user before serving banners that are tailored to his or her interests. The system is instantaneous, seamless and it boosts productivity both for publishers and advertisers. There are, of course, many ethical issues that need to be dealt with and the future of these methods is not clear.
Get paid to watch advertising?
In the states, there has been a fairly sudden emergence of pay to view advertising, such as AllAdvantage, which bypasses any question of privacy by obtaining consent from surfers. AllAdvantage was lionised for the original pay to surf program that allows users to download a "viewbar" and actually pays them to view advertising while they surf the web. They also then pay the surfer a proportion of the earnings generated by surfers introduced to the program, ensuring a steady growth for the network. This model has been shown to work but is treated with scepticism. On the other hand, there are now hundreds of companies on the Internet using similar models.
So, what's next?
There are more websites than ever popping up all over the place and more companies seeking to advertise. According to Jupiter Communications, advertising on the Internet is expected to reach $11.5 billion in 2003, up from $4.3 billion in 1999. What's more, the 2000 tech crash doesn't seem to have halted the flow of venture funds, although it will affect the way in which they are spent.
The problem is that advertising is considered a pillar -- it's hugely supportive of Internet operations and it "keeps the web free". Once you take away that support you get instability that can result in a dangerous knock-on effect. The dot coms suddenly have to look for alternative ways of generating revenue and it's tough going when prevalent "free" models have effectively whittled away so many of those options. Affiliate marketing will help in e-commerce and there will be huge growth in that area. Even so, CPM advertising is where all the money is and rates are falling. Many ventures will, at the very least, feel the pinch.
Fool USA
