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Commentary: Ad woes likely to continue

Internet advertising is still centered on e-commerce sites and driven by online entities in spite of companies' claims that they are shifting to brick-and-mortar advertising customers.

The reality is that too much Internet advertising is still centered on e-commerce sites and is driven by online entities.

That's in spite of efforts by Yahoo and other companies to attract investors by claiming they are shifting from dot-com to brick-and-mortar advertising customers. They're doing that because as dot-coms continue their struggle to survive, their ad budgets are no longer fat enough to sustain these ad-hungry sites, and heavy discounting of ad prices is continuing.

The initial promise of hypergrowth in Web advertising sales was based on the idea of Web banner ads generating value by direct click-through responses to advertisers' Web sites. Moreover, the Web site business model that relies solely on advertising revenue does not appear to be viable--especially for complex sites that require significant technical or personnel resources.

In the near term, the online advertising industry will continue the difficult weaning process from its reliance on dot-com advertisers and simple click-through ads. We believe Web ads will increasingly offer a palette of interaction options, ranging from flat ads to choices including multiple click-through, opt-in, interaction and multimedia. Furthermore, Web advertising will increasingly be rationalized as a component of multimedia, brand-centric marketing campaigns.

Despite the dot-com implosion, online advertising is still growing at an average rate of 14 percent per year. It has grown steadily during the past 18 quarters, and last quarter reached $2.1 billion in the United States. Although Merrill Lynch has reduced its estimate for 2001 to $8 billion (flat growth), it still expects 30 percent growth in 2002 to $10.4 billion, which would continue the long-term 14 percent growth curve.

This confirms that the real problem that Yahoo, Lycos and other advertising-driven sites have is not the long-term growth potential of online advertising, but the disappearance of venture capital that fueled the spike in Web ads generated by more or less ephemeral "dot-boom" start-ups.

A matter of faith
The value proposition of advertising has always been, in part, a matter of faith. In the pre-Internet world, methods for directly measuring advertising effectiveness included coupons, instructions to mention an ad to receive a discount, and reports from media outlets enumerating readership. But it was still difficult to measure the ability of ads to change perceptions and trigger customer actions.

Companies typically did not know with certainty which ad or combination of ads caused a specific consumer to walk into their store or place an order for a particular product. What was measurable, however, was the overall increase in sales that occurred during and immediately after a well-designed, multichannel advertising and public relations campaign.

See news story:
Online ads get in your face
One of the original attractions of online advertising was the potential to gather immediate empirical information on the effectiveness of each ad. For the first time, a medium could directly track ad viewers and count how many people took action based on the ad (by clicking through). Moreover, online advertising promised detailed statistics on individual ad viewers and, consequently, more precise targeting of subsequent campaigns.

Opt-in e-mail advertising is one subset of online marketing that has clearly delivered on that promise. E-mail campaigns have proven much more effective and less costly than bulk mail. The lists are much smaller, but response rates approach 30 percent--compared to 2 percent for bulk mail--because everyone on the list is prequalified by their own expression of interest. The advertiser knows each person is a potential customer for the goods or services being sold.

However, response to Web ads--measured in terms of clicks on links (taking the reader to the advertiser's site), immediate sales and other Internet-generated statistics--has been generally disappointing. The euphoria elicited by very high response rates (up to 15 percent) for the first wave of Web ads has dissipated, along with the novelty factor that fueled the high response. As Web ads have become familiar and their number has multiplied, response rates have steadily dwindled--first to 5 percent, then 2 percent and 1 percent, and now, about 0.2 percent.

The failure of online ads to cause more site visitors to interrupt what they are doing, click on the ad, go to the advertiser's Web site and make a purchase has led advertisers to question the effectiveness of online ads. However, the problem may actually lie in a misunderstanding of the real purpose and effectiveness of online advertising and false expectations for direct-response levels.

The wrong approach--and the right one
In terms of direct response, click-through ads create a basic conflict with the site containing the ad. The site strives to "capture eyeballs" and be "sticky" to retain its users. In fact, this is vital to the attractiveness of the site to advertisers. But an ad tries to draw those same users away from that site to the advertiser's site. The more successful a site like Yahoo or Lycos is in attracting and retaining users, the less likely those users are to leave it by clicking on an advertiser's link.

Dwindling click-through rates indicate that focusing on drawing users away is the wrong approach. Instead, we believe advertisers should invite readers to enroll in an opt-in list or send a request for information, enabling them to return to what they were doing quickly while capturing the customer connection the advertiser wants. Another option is to enable the user to click for more content or interactions within the ad itself.

Both advertisers and site developers must develop more creative mechanisms to exploit viewer interest beyond click-throughs to the advertiser's site. For example, the capability to bookmark the advertiser's site for later reference, rather than simply click to the site, would mitigate the inherent competition for immediate viewer focus that currently exists between the advertising site and the advertised site.

Overall, advertisers now spend $900 per person per year in all media in the United States. It's unclear what proportion of that total should be spent on Internet advertising to gain maximum advantage for advertisers.

To capture a significant portion of total advertising spending, Internet advertising must provide more clear value to leading brick-and-mortar advertisers and must be integrated into an overall marketing campaign. A coordinated print and electronic media advertising campaign will raise the level of brand awareness of and desire for the product.

Ironically enough, the best guarantee of the long-term growth of "new media" advertising may be its role as a complement to advertising in established channels such as print, television and radio, and within stores. Coordinated marketing campaigns across channels have been proven to generate higher levels of customer responses than the sum of advertising separately in each channel.

Toward a mixed approach
Going forward, we believe there will be a lot less trust in the "silver bullet" magic of marketing based on online advertising by itself, and more focus on including online marketing as part of an overall interactive mix (online and offline) that includes branded microsites built and designed exclusively for the campaign.

However, we do not expect that more creative approaches to advertising, and tighter coordination between traditional and new-media advertising, will be enough to change the basic economics of Yahoo, Lycos and their competitors. The long-term viability of these portal sites, as well as other complex or personnel-intensive Web businesses, will require additional revenue sources.

Charges for access to current capabilities of these Web sites is unlikely, given that this would quickly drive away many users and undercut advertising revenues. Sites must begin to deliver e-commerce services that enable them to gain revenue from transactions or deliver new value-added services that people are willing to pay for.

Relying on banner ads that have a very low click-through rate is not a recipe for long-term business success. The Web portals must turn free riders into subscribers, find ways to attract additional advertising from the brick-and-mortar world, or otherwise change their business model to find new sources of revenue. We have seen no evidence that they have been particularly successful with any of that so far.

The value of building and maintaining brand has sometimes been lost in the false promises of instant sales and precise statistics from Web advertising. Most sales do not happen that way, and usually a combination of factors, including advertising, public relations, company reputation, previous experience and personal contact, enter into a consumer's buying decision.

Advertisers must also see online advertising not in isolation, but as part of an overall strategy that involves print, TV, radio and the Internet. They should re-evaluate the reasons they buy online advertising and look beyond click-through rates to measure value.

Meta Group analysts Val Sribar, David Cearley, Jonathan Poe, Jack Gold, Mike Gotta and William Zachmann contributed to this article.

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