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Online advertising in transition
Industry is just going through growing pains, say many on the front lines

For clues to why some people think the online advertising industry is about to dry up, just look at InsWeb Corp.

InsWeb, the online insurance marketplace, went into a heavy-duty cost-cutting mode earlier this year, slashing a planned $75 million multiyear online and offline ad blitz. In addition to forgoing campaigns in newspapers and on shows such as ``Monday Night Football,'' the company stopped paying to slather general sites with banners bearing its no-frills purple and black logo.

Now the company spends the bulk of its much-diminished marketing budget -- officials declined to specify the budget before earnings are announced this week -- sponsoring the Insurance Center on Yahoo and paying affiliate sites such as Snap.com, E*Trade Group and the quirky e-mail service LifeMinders for referrals of customers who've indicated an interest in insurance.

``It's a very ROI-oriented strategy,'' said spokesman Greg Jones, referring to the company's new emphasis on ``return on investment'' for every ad dollar.

Such logic strikes fear in the hearts of investors in Web companies that rely on advertising for their living. Last week, investors pummeled shares of online-advertising company DoubleClick and mega-site Yahoo Inc., figuring a dot-com ad slowdown and a glut of ad space will curb earnings.

But, while there are indeed some worrisome trends in the short term, many on the front lines of the ad business say that the industry is going through growing pains, not death rattles. A key difference, they say, is that the companies that spend the big dollars offline are starting to view the Internet as a place to build their brand, not just a failed experiment in getting people to click on their ads like so many cash-register buttons. And history shows that the biggest brand advertisers favor mass-market media, indicating that the top dozen or so most-trafficked sites, such as Yahoo, MSN and AOL, will continue to attract the vast bulk -- now 70 percent or so -- of advertising dollars.

Those who buy and sell ads cite the fact that corporations currently spend only 1 percent to 2 percent of their total multibillion-dollar ad budgets online, but the people they are trying to reach spend about 15 percent of their media-reading time online, a level that is apt to get only larger.

``You know that advertisers are going to find a way increasingly to find those viewers,'' said Charlie Buchwalter, an analyst with ad-data company AdRelevance, a Jupiter Media Metrix company. ``People rob banks because that's where the money is.''

True, some trends are worrisome, such as the dot-com pullback in ad spending, which is contributing to a glut of online advertising space. And a growing array of advertisers are following the lead of credit-card and finance-oriented companies, which are declining to pay fixed rates per thousand ``impressions'' or ad sightings. Instead, they are demanding to pay partly on performance, paying perhaps $100 to $500 if a customer clicks on the ad, fills out a credit-card application, or becomes a credit-card customer. ``Everything is moving toward the idea that performance is important,'' said Albert Lopez, chief executive of AdFlight, which helps advertisers buy excess advertising space.

But advertisers, analysts and companies say that another breed of advertisers are beginning to view the Internet less as a cash cow and more as a way to brand themselves and relate emotionally to the people who surf there, setting the Internet up to finally take off as the $16 billion-a-year advertising medium many believe it is destined to become. Currently, advertisers spend more like $3 billion to $4 billion online.

Internet advertising specialists say a key moment in the shift toward turning the Internet into a branding space was when Coca Cola in January and February placed banner ads on sites such as mtv.com, sony.com and xoom.com, that were intended just to display their ``Coca Cola. Enjoy.'' advertising campaign, without attempting to draw ``click-throughs'' to Coke's site.

``That's a pretty clear indication to me that they are interested in building a brand, generating awareness, and reinforcing a good feeling about the company,'' said Richard Petersen, an analyst with Credit Suisse First Boston.

Petersen and others said the Net branding trend will take off once Internet companies can offer broadband access to wide swaths of the public. Broadband will facilitate moving images, so ads can have the kind of emotional appeal -- think romping puppies -- that advertisers crave.

Whatever the future holds, for now online advertising is a buyer's market. Even Yahoo, which has long had a my-way-or-the-highway approach to selling ads, has been cutting special deals with some advertisers, such as giving them ``bonus'' impression time for their ad dollars, advertisers say.

``Right now there is definitely a chance for advertisers to go back to publishers and ask them to lower their rates and ask for better deals,'' said Karen Gardner, manager of Internet marketing at real estate site move.com.


Deborah Lohse, Mercury News

Copyright © 2000 Mercury Center. All rights reserved.