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Online Advertising: It's Just the Beginning

On a dark freeway, a van swerves close to a sleek BMW. The van's door slides open, and masked gunmen threaten to fire unless the driver of the BMW surrenders his passenger, a seemingly harmless man the attackers accuse of smuggling diamonds. It's a simple choice: Do or die.

No, it isn't a scene from the latest summer blockbuster. It's a five-minute short film called Ambush, directed for BMW by John Frankenheimer of Manchurian Candidate fame. Ambush is the first in a series of five films that the luxury-car company commissioned from hot directors, including Ang Lee, who made Crouching Tiger, Hidden Dragon, and Guy Ritchie, the hip English director who's more famous for marrying Madonna than for his films.

The filmlets are advertised in 30-second TV spots, in movie theaters, and magazines. But the only place you can watch them is online, at Why? High-speed Net surfers are overwhelmingly men with incomes of $75,000 and up. And that's BMW's target audience.

BIG MONEY. Welcome to the new world of Internet advertising. It's cutting-edge. It's sexy. And despite countless rumors to the contrary, it's anything but dead. BMW spent tens of millions of dollars to develop its five-minute gems -- and Nielsen Net Ratings reports that BMW had 1.1 million visitors in June.

Moreover, it isn't only funky films that marketers are experimenting with. In 2000, U.S. advertisers spent $8.2 billion online, according to PricewaterhouseCoopers, up from zero as recently as 1994. While spending is expected to stagnate or even slip this year, $8.2 billion is serious money even by traditional standards. By comparison, outdoor advertising racked up $1.8 billion in sales last year, and the cable-TV ad business, which has been around for a quarter century, pulled in $11.2 billion.

"The audience online is growing. And advertisers follow their audience," says Robin Webster, CEO of the Internet Advertising Bureau, a nonprofit trade association. Indeed, about 174 million Americans already are hooked up to the Net, according to Nielsen/Net Ratings. And in June, the average Web user spent about 16.5 hours online, at work and at home, says Nielsen/Net Ratings.

Attempts by Web companies to cash in on all those visitors have been thwarted by several obstacles. This year's primary problem, of course, is the economic slowdown. Even well-established publications are having trouble finding advertisers, meaning that most Web sites are having worse luck. That's compounded by the fact that the Web is still a developing medium, with no firmly established standards for either presenting advertising or measuring its effectiveness. That in turn helps explain why the top six U.S. advertisers spend less than 1% of their budgets on the Web, according to Morgan Stanley.

REINVENTING ADS. Finding fast solutions to these puzzles is rapidly becoming a necessity. Indeed, for many Web sites that depend on advertising, survival is at stake. Eight billion dollars or not, "big advertisers still don't see the value of the Internet yet," says Morgan Stanley analyst Michael Russell. "We're going to see a lot more sites disappear before advertising is respected enough to completely support Internet sites."

On the bright side, many ad agencies and corporate advertisers are enthusiastic about the Web's potential. And even as they tread cautiously online, they're starting to focus on ways to reinvent Web advertising in the image of its offline cousins -- complete with more sophisticated presentation and broader standards for measuring success.

For instance, experts in the field now say that advertisers ought to forget about click-throughs, the widely used measure that determines how many times visitors respond to an ad. Online ads aren't meant only to spawn direct sales, according to this line of thinking: They're also for establishing or burnishing a brand, encouraging repeat purchases, and gathering customer information.

In June, the IAB's Webster compiled a list of 28 ways to use interactive ads. Only one -- driving traffic to a marketer's Web site -- bases success on click-throughs. Here are some of the key trends to watch as the search intensifies for a successful Net advertising formula:

Banners, Plus:

When you hit, the official site for Steven Spielberg's latest summer blockbuster, A.I. a "chatbot" instantly welcomes you and asks your name. If you strike up a conversation with it, you can ask anything from what chance we have at world peace (Answer: Do you mean you and me?) to if it likes ice cream. (Answer: I scream. You scream. We all scream for ice cream.)

Pretty clever. And definitely advertising. Warner Bros., which built the site, declines to say how much traffic it gets, but advertisers expect one-off marketing sites to continue to grow in popularity and effectiveness. "The real opportunity is to blur the line between where the movie starts and ends -- just like they did for the Blair Witch movie," says Tim Smith, CEO of RedSky Interactive, a San Francisco ad agency.

Though Hollywood has uncharacteristically taken the lead, such sites won't be restricted to summer blockbusters. RedSky, whose co-founder Joel Hladecek started his career building amusement park rides such as "Deep Earth Exploration" at the MGM Grand in Las Vegas, already is designing for more "immersive" applications that attempt to draw the visitor in and encourage participation. One of the latest RedSky incarnations is the Miller Lite Beer pager, an interactive application that lets surfers send personalized e-invitations to friends, complete with a funky Miller Lite animation. At amusement parks, "you are pulled in by the experience and let out the other side through the gift shop," says Smith. "That's what we need to do online."

Better Metrics:

Now that the industry is starting to break free of the ubiquitous number-of-unique-visitors and click-through metrics, expect to see many other measures of success. Online advertisers are beginning to use traditional testing to gauge the effectiveness of their ads -- including brand-awareness and intent-to-purchase studies. The new metrics already are bringing optimism to the business.

A February Morgan Stanley report showed that even the much-maligned banner ad is more effective at generating brand recall and brand interest than ads on TV or in magazines or newspapers. Consumers show a 27% greater ability to recall a brand after seeing an Internet ad than before. Compare that to magazines, which increase brand recall by 26%, newspapers' 23%, and television's 17%. Streaming media ads, which are little used at the moment, are 5 times as effective at generating brand recall as traditional banner ads.

As for direct marketing, it turns out that click-throughs aren't the best way to measure whether an ad drives sales. A December, 2000, study from interactive ad agency Avenue A showed that only 20% of consumers who made a purchase at one popular travel site had clicked an ad to get there. But the other 80% saw the ad initially, then returned later to the travel site to make a purchase.

Also, advertisers are now beginning to put together standards to measure the cost-effectiveness of ads online. The Internet's rate card based on CPMs (cost per thousand ad impressions, or views) looks high compared to other media. But Morgan Stanley calculates that the Net's effective CPM, the price that's actually paid by the advertiser after all bargaining and bartering is complete, is really about $3.50 for sites with broad general audiences (though it can be 10 or 20 times that for sites with more desirable audiences).

That's significantly lower than for other media. According to PricewaterhouseCoopers, average CPMs for daily newspapers are about $19. Prime-time TV, thanks to its broad reach, commands the second highest CPM at about $16. If done right, the Net can offer broad reach and sophisticated targeting, which makes it a pretty good deal.

More Intrusiveness:

"There has always been an unwritten contract that consumers enjoy a subsidy on their media consumption because of advertising," says Jeff Minsky, director of convergence at Rapp Digital, a top 50 interactive agency. "The problem is, no one has got that across to the Internet user." Minsky blames online ads' lack of impact heretofore on their modest size and scope. "Everyone was concerned that a big ad would ruin the user experience," he says. "It has to. That's the trade-off. You look at my advertisement, and I'll support your publication."

That's why you're suddenly seeing a lot more flashing, buzzing, pop-up, interactive ads. Larger ad formats are already appearing on popular sites such as CNET, ZDNet, and yes, even BusinessWeek Online. The ads, "rich media" in industry jargon, are also more likely to be accepted by traditional ad agencies, which have shunned static banner ads because they simply don't make money designing them. The average banner ad costs less than $10,000 to create, compared with $340,000 for the average TV spot. Now, the higher cost of rich-media banners gives agencies more room to turn a profit.

Another up-and-coming form is the "superstitial": A TV-style ad pops up and plays a 20-second animation or video. Advertisers from Coca-Cola and McDonald's to HBO and Hewlett-Packard have commissioned superstitials. Research conducted via a June Harris Poll shows that superstitials deliver marketers' messages as clearly and memorably as TV. It's the first study to explicitly compare Internet ads to established media. "This makes the Net a legitimate line item in a marketing budget -- instead of just an experiment," contends Dick Hopple, chairman and CEO of Unicast, which developed the superstitial format.

More Relevant Ads:

Relevance, or the ability to target ads to the most interested consumers, was a big selling point for advertisers when they began to flock online in the late 1990s. But it turns out that although many advertisers have been collecting data about consumer behavior and purchasing patterns, they haven't been making good use of it. According to Forrester Research, 74% of marketers placed ads based on audience demographics. This despite the fact that when asked for the most effective way to reach their target audience, almost three times as many marketers preferred sites where consumers research purchases over sites with a demographic profile that suits the brand.

Why the disconnect? It's not easy to put together complex "action profiles," which analyze when a consumer is motivated or ready to buy. Moreover, advertisers are used to designing a one-size-fits-all plan, not a series of ads that must be tested and retested to target consumers at each stage of the purchasing process. Still, those that take the time will reap the rewards. Agency Avenue A reports that one of its clients achieved a 162% improvement in sales when it targeted based on actual purchases instead of solely on demographics and click behavior.

Many marketers also fail to refine their online ad campaigns. Forrester reports that one-third of marketers make no changes to their online campaigns after they launch. Of those that do, the majority tend to wait up to two weeks before making changes. "Marketers want nice, neat little formulas. But if you do that online, you're are missing the boat," says Forrester analyst Jim Nail. "You're missing the real power to deliver on your client's objectives."

Integrated Ad Campaigns:

Online advertisers are going to have to stop living in a vacuum, the experts say. Until recently, many interactive ad agencies were either divorced from their offline counterparts or encouraged to think differently. No more. Xerox's printer mascot, Cajun artist George Rodrigue's Blue Dog, now graces the pages of newspapers, magazines, and the Web. For Hewlett-Packard's "Invent" campaign, ad agency Freestyle Interactive made the brand interactive by designing banners that allow surfers to adjust the size and shape of a paper airplane and see how it flies.

"A lot of people talk about convergence. It's not convergence of technology [that's important]. It's convergence of the message," says Alan Schanzer, managing director of Digital Edge, the interactive arm of Young & Rubicam that created the Blue Dog campaign. That's also what BMW is trying to accomplish with its film series. Some 85% of BMW customers are online, so creating a mixed-media campaign just "made sense" says BMW spokeswoman Karen Vonder Meulen.

Are these various strategies -- or some combination of them -- a magic bullet? Eventually, they will be. The key is putting advertisers at ease with the medium. That means not only rolling out studies that prove the Internet can measure up against TV and print for branding and direct marketing but also creating a set of standards for both accountability and pricing. After throwing millions of good dollars after bad during the dot-com heyday, it's clear that advertisers want sites to hit a high standard when it comes to delivering value for online ad dollars.

Marketers continue to say they'll aggressively push for so-called performance pricing, instead of price-per-CPM deals based on visitorship. Based on a series of interviews with marketers, Forrester predicts that 83% of ad spending will be based on at least some hybrid of cost-per-action and CPM by 2003. It's far from certain though that those metrics will even be necessary. The new measurement tools already are starting to reveal that online can deliver impressive ad performance results vis a vis other media. Once those metrics become standards, there'll be fewer questions about justifying online ad spending. There'll just be requirements.

Yahoo! co-founder Jerry Yang likes to tell how Procter & Gamble applied only 5% of its marketing budget to the relatively new medium of television in 1950. Five years later, TV ads accounted for 80% of the company's marketing budget. It's doubtful that even the new ad formats, metrics, and low prices will stimulate that kind of growth. Still, Forrester predicts that by 2005, early adopters -- such as P&G -- will spend as much as 23% of their marketing budgets on Internet ads. Overall by then, Forrester in January estimated online advertising will account for 9.5% of total ad spending, or $42 billion.

Because, of course, where consumers go, advertisers will follow. By Jane Black in New York

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