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Internet Ads Hit Rock Bottom; Some on AOL Are Free as Air

Two years ago, weight-loss provider Nutri/System Inc. stopped advertising on America Online because it couldn't afford the sky-high prices. Now, Nutri/System is advertising on America Online again -- at rock-bottom prices.

In fact, Nutri/System isn't paying at all. America Online is running Nutri/System's ads free for two months, and Nutri/System only has to pay $50 when one of its ads sparks a customer to buy a weight-loss package.

So it goes with Internet advertising. These days, Internet publishers are so downtrodden they are doing whatever it takes to win advertisers to their Web sites.

The biggest players are being hit the hardest. In April, AOL Time Warner Inc. Chief Executive Richard Parsons told investors that $1.8 billion was the "floor" for how low America Online's advertising and commerce revenues could go this year. But now the floor has dropped lower. On Monday, AOL said its online unit's ad sales could come in as low as $1.6 billion this year -- or about 10% lower than its previous forecast. That is a massive drop from last year, when America Online's revenue for advertising and commerce was $2.7 billion.

AOL's advertising woes are compounded by the fact that it is under investigation by the Securities & Exchange Commission and the U.S. Justice Dept. for alleged accounting excesses during its ad heyday. Last month, AOL said it uncovered $49 million that may have been improperly booked as ad revenue during the six quarters ending March 31, 2002.

America Online's problems are part of a broader meltdown in the online-ad industry. Smaller sites say they began feeling it as early as two years ago when AOL was still going strong. Now some sites are saying they have hit bottom and are recovering, while AOL and rival Yahoo! Inc. are still declining.

The relationship between advertisers and online publishers is undergoing a seismic reversal in leverage. In the late 1990s, young companies flush with cash poured money into high-priced banner ads on sites owned by the industry behemoths. At the peak of the boom, the average online ad cost about $6 per thousand viewers. Some Internet-related companies wanted so badly to get on AOL that they gave up chunks of equity in their companies to pay for the ads.

Now, average online ads hover between $1 and $3 per thousand viewers, and Web sites are going to extremes to survive. Many are running ads free and only getting paid when customers click on the ads. Other sites are running what appear to be news articles written by advertisers. And one Web site, Forbes.com, has even promised advertisers a money-back guarantee if their ads don't work at generating "brand awareness," as measured by surveys and other follow-up.

Forbes.com President and Chief Executive Jim Spanfeller said he decided to offer the money-back guarantee out of a "desperation to put the proper perspective on Web advertising."

The desperation appears to be working. The Online Publishers Association said it surveyed 14 of its members, including Forbes.com, Slate.com, USAToday.com and the Wall Street Journal Online, and found their collective ad sales were up 33.5% this year over last year. "I think there's been a flight to quality," says Michael Zimbalist, executive director of the association.

But it may be more of a flight to bargains. The kind of deal Nutri/System made with America Online -- known as pay for performance -- is in increasingly popular in Internet-ad industry. GartnerG2 Analyst Denise Garcia estimates 30% of online-ads are pay for performance -- a sign, she says, that media companies have a glut of inventory.

E-commerce companies, in particular, are focusing on pay for performance, rather than the traditional model of paying for ads based on the number of viewers. Hewlett-Packard Co.'s HPShopping site, for example, in the past two years has switched most of its ads to the pay-for-performance model.

Amanda Gooding, a marketing program manager for HPShopping, says the company still does some traditional advertising, but "we watch them very carefully to make sure they perform as well as our [pay-for-performance] deals."

Of course, pay-for-performance ads are risky for Web sites, which only get paid if a customer clicks on an ad or buys something. But both America Online and Yahoo have given in to it in some cases in an effort to rebuild relationships with advertisers.

Advertisers also are getting more digital ink for their money. Phil Beinert, an e-business manager for Volvo of North America LLC, says two years ago he mostly bought banner ads on MSN's Carpoint Web site. Recently, however, he persuaded Carpoint's editors and publishers to build a special section of their Web site called "Volvo Digital Garage" for what he would normally paid for banner ads.

Advertisers also are pushing for a presentation that some feel blurs the line between advertising and editorial. Sony Corp.'s Sony Electronics Inc. recently caused a stir when it placed a series of ads designed to resemble news articles, written by free-lance writers hired by Sony. The articles profile people who use Sony products, such as digital cameras, and appear on America Online's travel channel under the heading "a feature by Sony." Sony Electronics spokeswoman Lois Catala said the ads were designed based on guidelines published by the American Society of Magazine Editors. An AOL executive said the article is clearly labeled as being generated by Sony.

The distinction wasn't fine enough for everybody. A spokeswoman for the New York Times Web site says the site turned down Sony's ads because they didn't meet the company's criteria for "clearly labeling" advertising content. Nationalgeographic.com, Walt Disney Corp.'s FamilyFun.com and iVillage Inc.'s women-oriented Web site have the phrase "advertising series" in the article heading.


Julia Angwin, The Wall Street Journal. September 10, 2002

Copyright © 2002 Dow Jones & Company, Inc.. All rights reserved.