By Scott Kessler After reviewing my notes from the recent analyst conference calls held by DoubleClick (DCLK) and Yahoo! (YHOO) upon their fourth-quarter earnings releases, I find myself arriving at one unmistakable conclusion: Regardless of whether the online advertising market has bottomed, the long-term future for digital marketing is extremely bright. And that bodes well for those companies that provide ad-deployment services, such as DoubleClick, or operate media sites, such as Yahoo.
Although DoubleClick and Yahoo are only cautiously optimistic about the prospects for the market over the near-term because of the soft economy, both companies point to evolving trends and new technologies that position the Net ad segment for solid growth in the years ahead. With online advertising companies prominent in the public's consciousness -- and omnipresent on their computers -- I believe better times are ahead for the area.
The general rule of the media business is that advertising follows viewership. That means the greater number of people who watch a television program, listen to a radio broadcast, or read a newspaper or magazine, the larger the amount of money that can be charged to advertise on that particular medium. And advertisers will pay to reach the most people.
GROWING AUDIENCE. According to DoubleClick, people with access to the Internet spend about 9% of their time surfing the Web. And the company expects the number of users -- and the time they spend on the Web -- to continue growing. But companies only spend about 3% of their advertising budgets on the Net. This disparity suggests that spending to reach Web surfers will keep expanding as a percentage of companies' ad spending. Earlier examples of the growth of new media -- like network and cable TV -- bear this out.
Besides the sheer size of the fast-growing Internet audience -- estimated at well over half a billion people worldwide by International Data Corp. -- the appealing thing about the Web for marketers is that it enables them to target their ads to specific individuals in a variety of ways (see BW Online, 1/17/02, "Where the Online Ad News Is Good"). Online advertisers often fine-tune their offerings based upon things such as geographic location, PC type, connection speed, and recently visited Web sites. Readily available technology provides this kind of general information and is used to offer what marketers hope will be more relevant and appealing ads.
DoubleClick's DART (Dynamic Advertising Reporting & Targeting) technology is the most widely used online ad targeting platform (BusinessWeek Online is a DART user). It delivered 172 billion impressions (or ad viewings) in the fourth quarter of 2001.
NEW FORMATS. To promote their offerings more effectively, marketers also utilize specific user information, which may be obtained from purchase orders or newsletter subscriptions. In these cases, Web surfers often indicated a desire to receive advertising materials about a certain type of product or service. Marketers are more than happy to provide them with the latest information about special offers and discounts. It remains to be seen, though, if these promotions will retain their effectiveness as the online public receives more and more of them.
Still, there's little question that the Internet offers more potential for success than any other advertising medium by virtue of its unique targeting capabilities.
And it doesn't stop there. The Net also allows marketers to promote their products and services in increasingly innovative and effective ways. Online advertisers have made major strides beyond the banal banner, and companies are now offering a host of innovative new formats. Some new designs you may have noticed recently: skyscrapers (tall columns that run on either side of a Web page), big windows (found in the middle of a page), pop-ups (small boxes that suddenly appear on the screen), pop-unders (ads that hide in a new and separate browser window), animated clips, and streaming video.
BEYOND CLICK-THROUGHS. These newer formats frequently make for more eye-catching and informative online ads. And more important, they invite user interaction and investigation. The two-way nature of the Internet in general makes for a more memorable marketing experience. And for companies that sell products online, it provides a quick and seamless transition from advertising to order-taking.
Traditional marketers often scoff at the notion of online promotion, since "click-through" rates -- the percentage of Web-page viewers who actually click on links to the advertised sites -- are generally quite low. Nonetheless, Yahoo says its users spent more than $10.3 billion online overall in the fourth quarter of 2001.
Consider that advertisers commit huge sums of money to placements in other media, where results are neither guaranteed nor easily validated. The Net can provide clear evidence on ads' impact on sales and brand image, giving marketers unique and valuable information and insights.
REPORTING STANDARDS. And the measures of that impact should be even more accurate in the future. Leading Net marketing companies, including DoubleClick and Yahoo, recently agreed to standards regarding interactive audience measurement and ad campaign reporting and audits. These standards will enable online media to provide more exact data on ads' effectiveness, which will undoubtedly attract more traditional marketing money. The goal of every advertiser is to know what promotional efforts are working and why. The Internet makes this objective all the more achievable.
So as everyone wonders if the economic downturn is over and how strong the eventual recovery will be, one thing is certain: A new age of online advertising is upon us. And it has a promising future.
We at Standard & Poor's believe investors interested in the online-advertising segment will be best served by the companies leading this market. We currently rank DoubleClick a buy, as we see more room for appreciation in its shares. But we maintain a hold recommendation on Yahoo because of its lofty p-e ratio. However, both are great companies that we expect to continue to innovate and deliver for their customers. Kessler is an equity analyst covering Internet stocks for Standard & Poor's