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The Bright Future of Web Advertising


They say advertising on the Internet is a bust. Don't believe them. Companies are just beginning to explore the online world as a marketing tool, and they're moving past the banner ad to more adventurous ways to get your attention.

Vrooommmmm .......... Crash! Vroom ...Vroooom ...... VrooOOOOM ..................... Steve Hayden leans over a laptop in Ogilvy Interactive's offices high above the New York neighborhood that used to be known as Hell's Kitchen, trying to maneuver a tiny motor scooter around a maze inside an otherwise ordinary-looking banner ad. He grimaces as he clicks the pea-size arrow buttons, crashing the scooter over and over again. Then he stops, as the banner opens into a larger rectangle and plays a stylized black-on-gray Web movie that involves a handsome young Italian named Alfredo, a ripe-lipped mystery woman on a rooftop, and a Vespa motor scooter. The dialogue is in Italian, with English subtitles. An accordion warbles, Godfather-like. Thirty seconds later, boy gets girl. It probably helps if you're a geeky 25-year-old middleware buyer -- which is who the ad is directed at -- but it's cute nonetheless. "The creative in most banner ads sucks," says Jan Leth, OgilvyInteractive's senior creative partner, who's across the desk from Hayden, smoking a cigarette. "If you can combine the utility of the Web with the human touch, you have a winner." Hayden smiles. "La Dolce Vespa" -- an ad showing off IBM's e-business work for the Vespa.com site -- ranks as what he calls a "sit-forward experience," and Hayden has some expertise in this area. A vice chairman and the brand steward of the IBM account since 1994, he was also the adman responsible for Apple's famous "1984" Super Bowl TV spot, back when he was running Chiat/Day's San Francisco office. (If IBM was at all fazed by that ad's anti-Big Blue message, it seems to have gotten over it.) Life is good for Hayden these days: IBM announced in March that it was upping its 2001 marketing budget by 17 percent to $760 million, with more than $50 million targeted for online ads. "We've got the biggest profitable interactive agency in the business," Hayden says, "and we think that interactive advertising is just getting started. I am very optimistic about the business."

That seems to put Hayden on the short side of popular opinion, which for the last few months has become convinced that Web advertising is dying. A special report on online advertising, printed in the Industry Standard, a Silicon Valley trade journal, in March, was headlined "The Great Flameout." It's not hard to see how the Standard arrived at that conclusion: Throughout the winter, online publishers that depend on Web advertising for revenue were either revising their earnings projections downward, as Yahoo did in March -- cutting its 2001 earnings estimate by 40 percent -- or scrambling to find a way to make up for the ad shortfall by charging subscribers for content, as Salon.com and Variety have announced they will do. Web advertising firms like DoubleClick were laying off people by the hundreds, and Wall Street analysts were busily adjusting their estimates for online ad spending down, and then down again.

But the reports of online advertising's death aren't just exaggerated: They're stupendously wrong. The online advertising business has grown from next to nothing in 1994 to $8.2 billion in 2000 -- a new-media trajectory unmatched in the annals of advertising. Web advertising has already blown past the venerable "outdoor" category (everything from billboards to blimps), which had revenues of $5 billion last year. It's breathing down the tailpipes of the cable-TV ad business, which has been around since Richard Nixon was president and which produced total revenue of about $14 billion last year. The mighty magazine advertising business had total revenues of $17.7 billion in 2000 -- a record year. So $8.2 billion for online advertising, as they say around Madison Avenue, ain't exactly chopped liver.

It's true that the trajectory flattened in a big way in late 2000. According to the Interactive Advertising Bureau (IAB), an industry trade group, online ad revenue held steady throughout 2000. Market forecasters think that for 2001, total revenues will at best remain flat, and will probably decline somewhat. But the crunch in online advertising isn't happening in a vacuum. It's the leading, bleeding edge of a widespread meltdown in the entire advertising business. Magazine ad revenue was at $1.2 billion for the month of February, about the same as a year before, while ad pages were down nearly 10 percent from the preceding February; expectations for the rest of the year are grim. National TV spot ads are expected to be off by 20 percent for the first quarter, according to industry sources cited in Advertising Age. Overall, Merrill Lynch is predicting that total U.S. advertising spending will grow by a mere 2.5 percent this year -- slower than the overall economy -- and a recent Myers Reports survey found that advertisers and agency execs expect a 12- to 18-month wait before the media marketplace recovers.

When it does recover, however, the Web will be an integral part of many marketers' ad budgets. While it's true that many of the venture-funded dotcoms that boosted the Internet ad market have headed over the cliff like a herd of new-economy lemmings, bricks-and-mortar corporations are just beginning to take the Web seriously, and have started, in a measured but serious way, to devote real money to online marketing. Forrester Research surveyed 59 marketing executives last winter and found that traditional companies spent 8 percent of their overall budgets on digital media in 2000, with a median expenditure of $550,000. The marketers estimated that this allocation would rise to 15 percent by 2003 -- with a median budget of $1 million -- and to 25 percent in 2005. "Online advertising is going through its own Death Valley right now," says Jim Nail, who follows the advertising business for Forrester, "but there are clearly greener pastures ahead."

It's not difficult to figure out why large companies are eyeing the Net: Sometime late last summer, the share of U.S. households that are online passed 50 percent. According to Nielsen//NetRatings, Web surfers spent an average of 17 hours per month online at home and at work in January 2001. Advertisers will follow their customers. To do so, however, they need to have enticing ways to reach them. And until very recently, Web publishers, advertisers, and ad agencies were slow to exploit the technological possibilities of the Web. Due to a failure of imagination, or perhaps just their inability to understand, absorb, and capitalize on the possibilities as quickly as they emerged, these forces have allowed Internet advertising to remain shockingly static during the past seven years. Now, however, that's beginning to change: The speed-racing Vespa scooter is just one of many ways advertising executives are devising to make sure their clients get their money's worth on a Web-based ad buy. People are finally beginning to figure out what really works on the Web. As they put that knowledge into practice, the next generation of ads and Web marketing techniques should go a long way toward proving that online advertising can be effective. These days, there are two safe bets you can make on Internet advertising: It's not going away. And in a few short years, it will look nothing like it does today.

To understand where online advertising stands right now, and why innovations in Web ads have proceeded at something less than "Internet speed," you need to understand where it all started. The banner ad -- the mainstay of online marketing, still accounting for nearly half of all Web advertising -- wasn't some super-project dreamed up by slick admen in an 80-story office tower on Madison Avenue. It was invented in 1994, on the fly, in the funky five-story warehouse building in San Francisco's South of Market district that housed Wired magazine. Hollow doors on metal posts functioned as desks, and a staffer spun tunes from the Blade Runner soundtrack, the Smashing Pumpkins, and Portishead. The neighbors were homeless people, drug addicts, sweatshops, porn-peddling liquor stores, and a handful of other young multimedia companies. The inventors of the banner ad, the HotWired Web development team, were a band of 20-something geeks. They were interested in technology and communication, they were visionaries, and they were very, very smart. But advertising was not their thing. Brian Behlendorf, who was HotWired's webmaster, recalls: "We were sitting there with a website, trying to figure out something -- beyond it being a fun thing to do -- that we could do that could be of value to the company. We thought, the magazine had ads, so why not the website? It seemed kind of obvious." And so, in the most ad hoc manner possible, the HotWired folks created the banner ad. The banner was 468 by 60 pixels, for instance, not as a result of a big design project, surveys, or focus groups, but because that's what worked with the primitive Mosaic browser people were using. Remember, this was 1994 -- before Netscape took off, before Internet Explorer even existed.

Remarkably, for all that has come and gone on the Internet in the last seven years, a lot of companies are still using the same advertising format that was cobbled together in HotWired's offices. Go to almost any webpage and you'll still find a 468-by-60-pixel banner at the top of it -- sometimes with a little bit of animation, if the advertiser is feeling particularly frisky. Some companies have added search buttons or tiny video games to their banner ads, but for the most part, advertisers have been content to treat the banner as an inert announcement -- "the billboard of the information highway." Like a billboard, it's designed to get your attention, and also like a billboard, it's not a very interesting concept. Plus, once you click the banner, you often land on a boring corporate homepage that does little to engage your interest. Advertising Age's list of the top Internet ads is usually dominated by dreck. Number one in the March 26 issue was a banner for Bonzi Software that's designed to look exactly like an error message generated by Microsoft Windows. "Warning!" it reads. "Your Internet Connection is Not Optimized. Download InternetBOOST 2001 Now!" Click anywhere on the ad -- including the phony "close window" box -- and you're whisked to Bonzi's website, where the company tries to sell you software. Very clever.

The reasons for this lack of innovation are simple: As Jonathan Nelson, the chairman of Web consultancy Organic (and member of the original HotWired crew), points out, "Making interesting, animated, interactive ads is very expensive and very hard. It's not that people in this business are stupid; it's that we either haven't had the budget or the clients just didn't get it. They're looking for something that's more like a print ad." Also, Madison Avenue has been slow to devote its top talent to the online business. Robin Webster, CEO of the IAB, says, "I asked the head of creative at a major agency the other day if she had any top creative people working on interactive, and she just laughed. She said that at her agency, the ultimate thing is TV, and the top creative people are all just frustrated film directors." And then there is the fact that ad agencies and Web publishers have had little incentive to break the mold of Internet advertising. During the dotcom boom, they had no trouble attracting clients. In early 2000, startups fighting for visibility pumped much of their VC funding straight into advertising. "It was like there was a special armored airplane that flew from Palo Alto to Madison Avenue with all the money," says Forrester's Nail. "One week, some dotcom got funded for $20 million, and the next week they were on the air with a $20 million campaign." As long as the dotcoms were throwing big bucks around -- until last fall, that is -- online publishers found it so easy to sell plain-vanilla banners that they weren't keen to let advertisers experiment with new formats and new ad technologies. Who needed it? Add all this up -- an emerging medium, agencies flush with cash, complacent clients -- and you get seven years of banner ads and little else.

Now, however, everything seems poised for a change. Many ad execs report that old-fashioned, off-line companies -- which by and large had been excruciatingly slow to advertise online -- are now devoting part of their ad budgets to the Web. "We're starting to see larger, traditional clients developing 12- to 18-month strategies for doing branding online," says Steven Marrs, CEO of Tribal DDB, the interactive arm of DDB Worldwide. "Companies like McDonald's, who are looking to drive store traffic, [and] consumer packaged goods companies like Procter and Gamble."

As these companies venture online, they seem far less likely than their dotcom predecessors to simply hurl money blindly at branding efforts. These are people who expect to see results, which means they're apt to ask hard questions about online advertising. How well does it work? Does it work at all? From the tone of recent coverage of Internet advertising, you might think that the answer to the latter question is no, but yet again, there's a disconnect between the popular skepticism and business reality. Of course it works. The most compelling evidence is that companies like Nike, Visa, and IBM wouldn't continue to pour tens of millions of dollars into something that has been shown not to work. There is also a lot of market research that supports the effectiveness of even banner ads. One of the most exhaustive studies, conducted in 1997 by Millward Brown Interactive (now Millward Brown IntelliQuest) on behalf of the IAB, found that by all the traditional measures, Web advertising's impact was very similar to ad effectiveness in other media.

But as large corporate clients begin to embrace the Web, they're challenging some of the long-held assumptions about the way advertising works online. For starters, they're reexamining the way websites charge advertisers. Currently, ad rates are based on the number of times users view a page with a given ad, expressed as the "cost per thousand," or CPM. Banner-ad CPMs vary tremendously, from as little as $5 on low-rent sites to as much as $90 for highly targeted ones; the average is about $34. Nowadays, though, advertisers seem to believe they've finally found a way to address that famous complaint of Philadelphia department-store magnate John Wanamaker -- "I know that half the money I spend on advertising is wasted; but I can never find out which half." They've become dubious about CPMs, and are pushing instead for performance-based pricing that reflects the "click-through" rate -- the number of Web users who actually click on an ad. The click-through rate has fallen faster than the Nasdaq index in recent years, from as high as 30 percent in the mid-1990s when banners were a novelty (and also often featured come-ons such as "Shop Naked!") to something below 1 percent today. But most Web publishers have been unwilling to offer that kind of pricing. For one thing, a low click-through rate can just reflect a lousy ad. For another, if you're selling $2,500 servers, a 1 percent click-through rate can be phenomenal if even a few of the clicks result in sales. But the biggest problem with pegging ad rates to click-throughs is that they're meaningful only for direct-selling campaigns -- that is, campaigns where success is determined solely by a customer's decision to buy something on the spot. What about "brand" advertising, the kind that dominates other media, from Budweiser's "Whassup?!" to Campbell's "Soup is good food" to the Marlboro Man?

This, in turn, leads into an even bigger debate going on among advertisers: Some critics of Web advertising -- often the same people who think the click-through rate is the only measure of online advertising effectiveness -- think the Web really works only for direct marketing. One who leans in this direction is David Kenny, CEO of the interactive-marketing firm Digitas. "Those who have tried to use the Web as a mass medium -- those who've tried to replicate broadcast online -- have been very disappointed," Kenny says. "It doesn't work that way." A recent Digitas campaign for Saab illustrates Kenny's idea of what the Web is good for. The campaign was intended to get qualified potential buyers to sign up for Saab test-drives. Instead of running a banner, Digitas placed links on sites that appeal to the same high-end yuppie consumers who go for Swedish cars. So on Epicurious.com, the site "for people who eat," Saab put up a link that read, "Visit Napa Valley -- in a Saab." When gastronomes clicked, an ad popped up telling them that there was a sweepstakes for a Saab, which they could enter by signing up for a test-drive. After they filled out a little profile, a local dealer would call to make an appointment. "We got a huge take rate," Kenny says.

But most admen disagree with Kenny, and feel that the Web is a fine medium for brand advertising. "The whole debate about direct selling vs. branding is misplaced," says Rick Boyce, president of online network Snowball.com, which publishes websites like ChickClick. "It's not about the media form; it's about the message in the ad." Boyce argues that the reason more advertisers aren't using the Web for branding isn't that the medium is inherently hostile to it -- it's just that the ad formats the Web has offered so far, notably the banner ad, have been ill-suited to branding efforts.

But what if Internet ads could break out of the banner-ad box? Would the Web then become a medium for the same sorts of lavish branding campaigns that are splashed across TV, radio, and billboards? We're just beginning to find out. Within the last two years, what might be considered the second generation of online ad formats has begun to appear. One is the "superstitial," unveiled by online marketer Unicast in April 1999. Billed as "the Internet's commercial," these are designed to work like TV ads. When you go from one page on a website to another, they pop up in a window and play a 20-second animation. "We're offering a canvas in which to build a message that's as compelling as other media," says Allie Shaw, Unicast's VP for worldwide marketing. "The absence of that is why traditional advertisers had stayed away from the Web." By the end of 2000, Unicast had signed up 275 websites to host the superstitials, and business has picked up strongly in the past six months. These ads now run on more than 350 websites, including such major sites as Excite@home. Advertisers using the format include Dodge, MasterCard, and Virgin Atlantic. About 85 percent of the advertisers, Shaw says, are traditional, non-dotcom companies.

Another innovation has been the introduction of new ad formats that are bigger and more prominent than the typical banner. The formats, which follow common standards promulgated by the IAB, include larger banners that run the full width of the webpage, banners that run down the full length of a page, and large rectangular ads that are positioned within a webpage's editorial content. These aim to accomplish the same results as display ads in newspapers and magazines. The major innovation in the new formats, which have begun appearing on sites such as Yahoo, CNET, and TheStreet.com, isn't just their size: It's that they can handle richer graphics and animation, and that they provide for far more interactivity within the ads. Thus, one of the new ads for Nextel cell phones running on CNET features a product demo of Nextel's new keypad text-entry system, which you can try out within the ad. "What these will prove," says Barry Briggs, president of CNET Networks Media, "is that brand advertising can work on the Web.... There are more complicated stories to tell, and we can use interactivity to make the consumer's experience deeper, richer, and more compelling than in other [media]." (Web users may grouse about this appropriation of webpage real estate, but it's something they'll have to get used to. In most media, advertising eats up far more space than on the typical website. Newspapers think nothing of running a few inches of text along the top of a page while devoting the rest to ads, and in most magazines the ratio of editorial content to advertising is about 50-50.)

If these new Web advertising formats catch on, companies seem to be more likely to incorporate the Internet into their branding campaigns. But there is still one hurdle to clear: that nagging problem of how to determine how effective those campaigns are. Click-throughs can't measure the impact of a branding campaign, and while the number of pageviews a page gets can tell you how many times an ad has been seen, it can't really tell you who has been looking at it. Oddly, this wasn't supposed to be a problem on the Web. From the start, the online world has promised quantifiable information about who is looking at each ad, and for how long. "In hyping the Web to begin with, we grotesquely overpromised our ability to do branded electronic customer management," says Ogilvy's Hayden. "We said we'd know every person we were talking to, we'd have a personal relationship with them and all the information about them. We've found that we didn't really know everything we thought we did." The metrics that are used to judge the effectiveness of other advertising media -- like Nielsen ratings or the MRI surveys of magazine readers -- are not exactly models of technological precision. They can't tell advertisers what they most want to know, which is whether consumers actually saw and were influenced by their ads. But many advertisers will continue to be leery of online advertising until some analogous, accepted measuring system arises -- a system precise enough to reassure advertisers that they're getting what they paid for, but imprecise enough to avoid rankling privacy advocates, who tend to bristle at the notion of websites tracking users too closely. The IAB recently commissioned PricewaterhouseCoopers to do a study of all the software that has been created to measure online ad results and make some recommendations for industrywide standards.

Assuming that hurdle can be cleared, the business of advertising on the Web is poised for a sudden burst of innovation. There are several very different visions of the future of online advertising and marketing. For Digitas's Kenny, the Internet represents a chance to return to the era before broadcasting, when marketers had a more personal relationship with their customers. "Until very recently," he says, "you marketed products by sending traveling salespeople to communities and going door to door.... After World War II, with the advent of broadcast media, it became efficient to ask people to join communities in a big global way: Join the Pepsi generation, join the flower-power community." But as people gravitate to the Internet and the television audience fragments, Kenny argues, it's no longer possible to broadcast an ad to the masses. While some might see this as a liability, Kenny sees it as an opportunity. "The technology now enables you to deal with everybody individually again," he says. "As a result, the whole notion of brand can become personal again, or be embedded in an online community."

Digitas, for instance, recently created a website for Johnson & Johnson to market an acne medication called Clean and Clear. "We were thinking, who's going to go to that?" he says. "The idea was to reach teenage girls. So where are the teenage girl communities?" Digitas targeted teen chat rooms, and placed messages on websites like Bolt.com that looked more like part of the site than like banner ads, encouraging teens to send talking postcards to their friends, which in turn led the bepimpled teens to an e-mail database that gave them each a skin analyzer and a coupon for a free sample. "It succeeded," Kenny says, "because Clean and Clear became part of the teenage girl community, as opposed to trying to direct people to stop what they're doing and click some banner to go to a boring old website."

But Tim Smith, founder and chief strategic officer of digital marketing firm Red Sky Interactive, has a very different vision. As Smith sees it, customers won't so much want a one-to-one relationship with companies as they'll want to be entertained and enthralled by companies' offerings. For Smith, only advertising so compelling that consumers want to be involved with it will work on the Internet of the future, and he thinks it will be a place of rich media and sensory overload. He likens it to the busiest shopping malls in Tokyo, where you'll find 10 Jumbotrons alight, hundreds of video screens, drumming bands, dancers, peddlers, "and a 15-year-old girl selling bootlegged Viagra at a card table." To get a hint of what he's talking about, visit the raucous multimedia website Red Sky created for Altoids breath mints, at Altoids.com. Images splatter across the screen like a Grateful Dead light show. Text and photos and icons throb woozily. A message orders, "Don't just sit there! Click something!" You many wind up on a page called "Pop Culture Wars," where you're encouraged to vote on a debate between a fusty professor and a Valley girl on the merits of feng shui -- a debate that can be hard to hear, given the music blaring from your speakers. But Smith thinks this is just the beginning of what online advertising will look like. "It's when Napster meets eBay meets Nike meets gaming online," he says, "and it will be something like Times Square on acid and ecstasy at the same time. Once we're there, and we look back at today, it's going to be like 'What were we thinking?' " Smith pauses. "The Web will have a billion users in 2005," he says, "and it's the loneliest place on earth. Whoever starts to bust it out and make it social will be wildly successful."

The more you listen to people like Kenny and Smith, the more the industry's internecine arguments seem ultimately pointless. Direct marketing or branding? CPMs or click-throughs? Banners vs. superstitials? Why not all of them? As for the competing visions of the online future, who says they have to be mutually exclusive? Perhaps direct marketers will use the Web just the way they've used clip-out coupons in newspapers and call-in ads on late-night TV; a company that wants to make its brand and logo ubiquitous will splash them across banner ads; websites like CNET that feature tech news will publish magazine-like ads that allow advertisers to provide in-depth information; entertainment sites will use rich media pop-up ads to show movie trailers and run commercials; and so on. Simply put, the Internet offers advertisers something they can't resist -- the attention spans of a massive audience. And if there's one thing that the history of marketing has taught us, from the Fuller Brush man to the $2 million Super Bowl spot to the Target boxes that crop up on Survivor, it's that wherever there's a large audience, sooner or later the marketers will find a way to reach it.

 

Rob Norton, eCompany Now. June 2001.

Copyright © 2001 eCompany Now Inc.. All rights reserved.

 

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