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Blind faith in traffic as Web currency

The universal acceptance of raw visitor numbers as the Internet's unofficial currency created the false assumption that Web portals and other advertising-driven businesses guaranteed the viability of free services. How was everyone duped so easily?


Blind faith in traffic as Web currency

By Sandeep Junnarkar and Jim Hu
Staff Writers, CNET
June 4, 2001, 4:00 a.m. PT

If Marty Yudkovitz learned anything about television from his 17 years at NBC, it was that where people go, money follows.

He believed the same would be true of the Internet. So Yudkovitz became president of interactive media at the TV network, a position key to the development of NBC Internet--the Web property formed by the merger of portal (created by CNET Networks, publisher of, home page community and several smaller sites.

That is a decision he might well question for the rest of his professional life.

"There was the assumption that if we gather enough people on the Internet service, we'll find a way to monetize it. That was a lot easier said than done," Yudkovitz said. "Today, there is no business model on advertising. The big promise wasn't fulfilled."

Like many other executives in new and traditional media, Yudkovitz fell prey to the seduction of Web traffic, seeing it as the key to success in commercial cyberspace. The universal acceptance of raw visitor numbers as the Internet's unofficial currency may go down as one of the greatest fallacies in modern business history--and its downfall as the beginning of the end for the free Web.

Many executives who once based their businesses on traffic now say they were well aware of the risks, because advertising revenues were limited and other ways to make money had not been proven. But during the dot-com heyday, practically everyone from chief executives of start-ups to investment bankers on Wall Street claimed that Web companies would revolutionize the way business is done.

The resulting blind faith in traffic became the Internet's version of the emperor having no clothes: Everyone knew something was amiss, but no one would say so because that would challenge the reasons for their own existence.

Moreover, the validity of research systems used to count site traffic has remained an open question. But in the absence of a standard industry metric, research companies such as Jupiter Media Metrix and Nielsen/NetRatings became the Web's de facto scorekeepers, and their monthly rankings can still make or break a company that depends solely on advertising for its livelihood.

see related story: A question of numbers As industry analyst Clay Shirky put it, "People would have to say, 'If we question that number, then where are we? Isn't that why we come to work every day?'"

Counting on traffic
In this environment, it is understandable that entrepreneurs would do whatever they could to draw the most visitors to their sites--and, even more important from a business perspective, to bolster projections for growth.

Companies would often present complex algorithms, bewildering investment analysts who said they had no idea whether these formulas were right because they had no historical data or case studies to provide the kind of research typically used to measure the worth of a business.

"It was a classic case of the more guesses you put into the algorithms, the greater you compound your error rate," said James Preissler, a former Internet analyst for investment bank PaineWebber. "It was a guess built upon a guess built upon a guess...and so on."

Media Metrix extrapolates overall Web usage from the surfing patterns of 100,000 people tracked mostly from home, groups known as "panels." Rival PC Data draws its conclusions from 120,000 people using the Net, while Nielsen tracks 220,000 people worldwide, 70,000 of whom reside in the United States. All panels are monitored using software installed on their computers, but Media Metrix is the only one to watch services that do not require traditional Web browsers, such as music-swapping network Napster.

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The most common criticisms of these measurement scales have to do with their limited panel sizes and the lack of data about people who use the Web from work, given that many companies will not install tracking software on their networks. As a result, site visits from the workplace are underreported.

None of this did much to quell the ardor that propelled the Internet juggernaut in the late 1990s. As use of the Web grew exponentially every few months, companies such as Yahoo, Terra Lycos, Excite@Home, Walt Disney's and CMGI's AltaVista joined NBCi in the race to harvest the most visitors. Traffic instigated a familiar cycle of skyrocketing stock prices that inspired billion-dollar-plus acquisitions based on inflated market values.

The primary reasons for the evangelism of traffic were irresistibly simple: It seemed easy to count, its growth rates were impressive, and--perhaps most significant--no competing measures were obviously available. The traditional barometers of revenues and earnings were abandoned because the industry as a whole was so young.

In fact, the standard joke at the time was that the best way to kill a company's stock was to show a profit. Today, by contrast, entrepreneurs might well be laughed off Wall Street if they were to invoke such 1999 buzzwords as "eyeballs" and "stickiness" in making pitches to go public.

"Operating history was not a high priority in the past because these companies were brand-new and, if they were signing partnerships with other companies, to us that indicated they were sound businesses," said Andrea Williams Rice, a managing director at Deutsche Banc Alex Brown. "Today the bar is much higher, and we are looking for strong operating history and a proven management team."

Misguided metrics
As obvious as this may seem in retrospect, it took an economic meltdown for the industry to acknowledge the questionable logic in measuring entire industries by hit counts alone.

Until the Nasdaq composite index lost 19 percent of its value in a week in April 2000 and entered a yearlong slide, traffic reigned supreme. Companies and the investment banks underwriting their initial public offerings did little to diffuse investors' reliance on traffic to guide their decisions, apart from the customary--and largely ignored--warnings made in the standard fine print of the IPO process.

Today, facing a devastating slowdown in advertising, Internet companies are frantically searching for new ways to make money. But ads remain their primary source of revenue, even as they try to distance themselves from the traffic rhetoric of the past.

"There's nothing wrong with advertising revenue--it's not a bad word," said Phil Leigh, an analyst at brokerage firm Raymond James. "I do think that traffic is important because ultimately it represents audience, and ultimately audience will be monetized."

With that hope wishfully percolating through the industry, the number of visitors to a

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site will remain a vital statistic. For media buyers, such measurements are a necessary starting point, rooting out a once-unknown site with growing popularity and justifying the higher fees charged by brand-name sites.

Just as the Web relies on measurement firms, television has its Nielsen viewer measurement service and newspapers and magazines have circulation bureaus that tally readership. Although all these devices are designed to do essentially the same thing--count people--Web companies have promised advertisers the ability to learn more about potential consumers through tracking technologies not possible in other media. That may have created some unrealistic expectations.

The purpose of traditional advertising is to create a positive image for a product and reinforce a brand's recognition through repetition and prominent placement. On the Web, however, clicking on banner advertisements and providing personal information in direct-marketing questionnaires became the gauge of an Internet ad campaign's success.

"How many people do you know who see an ad for a car, shut off the TV, run to the dealer, and buy the car?" asked Xavier Dreze, a professor of marketing at the University of Southern California. "No one does that, and no one expects people to do that--but they do expect that when it comes to online advertising."

The Web companies may have only themselves to blame for that misperception. After all, they were the ones that sold advertisers on the ability to study the viewing and buying habits of consumers, all the while getting instant feedback from interested shoppers.

David Vogler remains optimistic that the online advertising and commerce business will eventually find its way, having seen a similar evolution in television. But it may take awhile.

"The Nielsens may not be completely accurate or scientific, but they're the gold standard that everyone has agreed to follow," said Vogler, who held executive positions at Nickelodeon and Disney before becoming chief creative officer of Web design studio Mutation Labs.

"The Web has struggled because traffic was the Holy Grail, but everyone looked at the numbers differently," he said. "We need to reassess how we measure success."'s Paul Festa, Stefanie Olsen and Mike Yamamoto contributed to this report.


As Net stocks skyrocketed in the '90s, analysts touted online advertising--and sites relying on it. But many glowing predictions were dimmed by the economic downturn in the new millennium.

Mary Meeker
Morgan Stanley

In December 1996: "Estimates of Web ad revenue in the year 2000 range from $1.7 billion to as high as $5 billion. In any case, the point is simple: Web ad revenue is likely to become a big number, and quickly...If the past levels of advertising spending per eyeball for other media are prologue, then advertising on the Internet could be one big honkin' business opportunity!"
--From equities note: The Internet advertising report

By 2001: Online ad market sales did indeed surpass expectations, hitting $8.2 billion in 2000 according to the Interactive Advertising Bureau and PricewaterhouseCoopers. Despite the tremendous figures, advertisers began to question the efficiency of Internet banner advertising. With few Internet companies surviving to fuel the online ad explosion seen earlier, Web companies are scrambling to prove to traditional consumer companies that the Net does offer strong branding opportunities.


Cowen & Co.

In August 1997: "What sent Yahoo into the upper atmosphere was that they proved their business model. It's the most leverageable and scalable business model we've come across in any company."
--From interview

By 2001: Yahoo's over-reliance on revenue from fledgling dot-coms willing to spend all their funding on advertising proved to be a shaky foundation on which to build a media empire. In April, the company just beat lowered earnings expectations. It has seen its stock tumble from a high of about $250 per share to around $20 and has suffered a major executive exodus, including CEO Tim Koogle.

Keith Benjamin
Robertson Stephens

In May 1998: Excite's "aggressive strategy of expanding its network through co-branded content and acquisitions will result in a solid and profitable franchise."
--From research report quoted on

By 2001: Excite began a long decline as a portal powerhouse after it was acquired by @Home in May 1999. With the online advertising market slumping this year, Excite@Home recently warned Wall Street that its 2001 revenue looked weaker than previously expected. The company has seen several top executives flee. It says it is facing a cash crunch and looking for new sources of funding.

Henry Blodget
Formerly at CIBC Oppenheimer

In January 1999: "We believe (the Internet) bubble is different from other (financial) bubbles--the stocks are clearly worth something...We believe that traditional valuations metrics will continue to be a lousy tool for predicting Internet stock performance--if the Internet stocks fall to the point that they look cheap, it will be because they aren't worth owning anymore."
--From research report "Surviving (and profiting from)"

By 2001: New Economy measurements such as "traffic," "eyeballs" and "stickiness" sent Internet stocks soaring in the late '90s but were ridiculed shortly into the new millennium. Traditional gauges such as "revenue," "earnings" and "the bottom line" came roaring back with a vengeance, sending the value of Internet stocks to a fraction of their what they were once worth.