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October 11, 2000 Event
You Say You Want a Revolution: The Inevitable
Transformation of Online Advertising
As the companies featured on fuckedcompany.com can attest, generating
substantial revenues on the Internet is a difficult proposition. Those who
rely on advertising-based models are in the most perilous positions. A
surplus of inventory and deplorable performance has led to deteriorating
demand and rock bottom CPM pricing. No one is immune to the trend: in the
last few months, mighty Yahoo! has lost 40% of its market cap due to
dependency on advertising revenue. Yet analysts predict that online
advertising revenues will leap from $1.5 billion in Q4 2000 to $3 billion
in Q4 2003. Where is the money going, and which companies are best poised
to capture it? In a world where performance has replaced promotion as the
Web’s rallying cry, the entire online advertising industry is headed for a
permanent and profound transformation.
Defining the true value of online advertising has been an elusive
endeavor. Just one short year ago, the New York Times described the
industry in this interesting way: “companies have recognized the Web's
potential for brand advertising.” However, using 480x60 pixels of space
for branding seems like an exercise in futility. Another major shortcoming
of current models is their use of click-through rate as a de facto metric
of success. Click-throughs only matter if they result in acquired
customers. Since performance is the goal, the very notion of pricing by
CPM may be inappropriate and outdated. After all, the impression-based
model is a borrowed heuristic from the sibling media of television, radio,
and print. As companies increasingly base ad spending on ROI, pricing per
performance – not per impression – will become par for the course.
Perhaps the greatest challenge facing online advertising is the nature
of the medium itself. Because of the Internet’s unparalleled ability to
track and target, new media companies are held to a standard far above
their offline counterparts. Accordingly, a path to profitability via
online advertising does not lie in embracing old media models. First of
all, the Web is capable of inviting AND finishing transactions, a crucial
detail unaccounted for by the impression-based model. In addition,
creative strategies from contextual placements to rich media alternatives
will proliferate; advertisers already are tired of paying for rationalized
offline success statistics. Regardless of exactly how the future unfolds,
online advertising models clearly must change. At present, it takes far
too many penny-per-page impressions to build a viable online business.
The
Persistent Rise of Performance Based Advertising
Dot-Com
Doom? No, Says New Data
Key Learnings
KNOW THY CUSTOMER
Current CPM pricing models imply that online companies have little or
no incentive to ensure that they are maximizing clickthrough.
Pay-for-performance sales models offer online companies an incentive to
align consumers' interests with advertisers selling products. In order for
online companies to maximize revenue via pay-for-performance sales models,
they need to select advertisers that provide the best value proposition to
users, and hence generate the most sales. Publishers must also think more
strategically about ways of making their advertising more attractive to
users. A world where readers don’t mind viewing advertising is not
unimaginable, but it is impossible in today’s world of spadvertising.
GIVE INTERNET SPEED SOME TIME
Offline advertising evolved over 100 years, during which its
infrastructure and associated metrics (Nielsen ratings, reach, etc.) took
considerable time to develop. With mature metrics in place offline
advertising today is subject to an ROI analysis on a marketing budget.
Online advertising will mature in time as well. Today’s online advertising
market is one in which online ad inventory supply simply outstrips demand.
This is tantamount to the launch of television with 1000 channels and an
unproven return on advertising. As online metrics mature, more accurate
pricing of advertising, whether it be CPM, CPC, or CPA, will inevitably
occur as well. In the short term, expect brand-sensitive, dominant offline
companies to keep CPM models alive while CPC models offer advertisers a
more tangible and results-driven packaged to offer their clients.
A NEW BRAND WORLD
Branding is emotional, intangible and non-quantitative. Measuring
branding success online in a measurement-obsessed medium has become a
difficult exercise. The Web is proving to be a better medium for direct
response than for brand-based advertising. Permission-based email
marketing may prove to be the most effective form of online advertising
because it captures people at their most common point of contact.
Conversely, brand-based advertising is most effective when advertisers can
capture 100% of the medium (i.e., entire screen or interstitial). The
measurement capabilities afforded by the web are simply more optimized
toward the measurement-based requirements of direct response advertising
today. How users feel after clicking on an ad is thus of secondary
interest next to the more tangible fact that they clicked.
BROADBAND = BROADBRAND
Although Wall Street and venture capitalists continue to shun
advertising-based business models, their demise will be short-lived as the
majority of Internet users begin to access the Internet through faster
connections. Broadband access enables Internet advertising to not just
mimic characteristics of the television advertising medium but surpass it.
The range of value afforded by online advertising has hardly been tapped -
highly interactive capabilities, deep demographic targeting, full-motion
video, and impression-based brand building are just the start. Advertisers
will once again pay for the ability to build a brand online through
creative broadband-targeted advertising campaigns that will provide richer
information about potential customers than television advertisers could
ever dream of.
QUOTES of the NIGHT:
"Is online advertising by offline companies as effective as offline
advertising by online companies?"
"I don't know who is in the worst position: the people buying or the
people selling advertising online."
"Let's all hope the party continues."
"The real question is: Will Yahoo be left standing when it's over?"
