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 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 Snap.com (created by CNET Networks, publisher of News.com), home page community Xoom.com and several smaller sites. "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. 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 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.
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 Go.com 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 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
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." News.com's Paul Festa, Stefanie Olsen and Mike Yamamoto contributed to this report. |
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