To The Victors Belong The Web Ads

Yahoo! and just a few other sites rake in the big bucks

One question plaguing Internet stocks lately has been whether companies that charge nothing for using their Web sites could succeed simply by selling advertising. The good news: Yes, companies can thrive on advertising alone. The bad news: The number of those that can do this seems to be shrinking, as marketers spend more and more with just a handful of big sites. According to the most recent survey by the Internet Advertising Bureau (IAB), the share of ad revenues among the top 10 sites continued to expand, from 64% a year ago, to 75% in the first quarter of this year.

The most important sign of this phenomenon is the growing clout of the top site, Yahoo!, which confirms that it will raise ad rates next year. It's not giving out the details, but analysts peg the hike as high as 20%. And with its 80 million users, Yahoo! should be able to make the rates stick, analysts say. That mass audience is the closest thing in cyberspace to network TV--making it a must-buy for many advertisers. "We have a brand that commands a premium," says Anil Singh, the Yahoo! senior vice-president for business operations.

This isn't TV, however, and numbers alone won't work for many advertisers who want to take advantage of the new medium's ability to identify exactly who is in the audience. For these advertisers, it doesn't matter how many eyeballs a portal can deliver: They want only motivated buyers. "We were disappointed with the portals. They didn't even reach our low expectations," says Peter M. Neupert, CEO of Inc.

What are some the strategies not working on the Web these days? Banner ads is a top example. They're still the staple of online advertising, accounting for 58% of Net ad sales in the first quarter. But advertisers are beginning to see that such vaguely targeted ads bring little response. In an August survey, researcher Strategis Group found that 52% of the people polled hadn't clicked on an ad within the past week, and 40% couldn't recall the ads that induced them to click.

NEW WRINKLES. So ad rates for banners are on the decline. According to Forrester Research Inc., the cost for banner ads has dropped from $20 last year for every 1,000 times an ad was displayed, to about $10 this year. "The standard ad buy is not effective for most advertisers," says Scott Heiferman, CEO of i-traffic, a New York online ad agency whose clients include Staples Inc. and Walt Disney Co. Instead, Web sites are modifying or even dumping banner ads in favor of specialized programs, such as targeted e-mail or sponsorship agreements where a company is the permanent advertiser on a site. For instance, women's site has created an area on its site for Ford that asks visitors to design their dream car.

But new ideas are still needed. While Forrester estimates that U.S. online ad revenue will zoom from $2.8 billion this year to $22.2 billion by 2004, Heiferman says that companies need more basic testing and creativity to hit those estimates. Yahoo! Inc., for example, will start charging extra for finely targeted ads. Other sites that understand their audiences are expected to mimic Yahoo! in raising rates. Meanwhile, at least for the big sites getting the most bucks, Yahoo! will spread some New Year's cheer with its rate hike. "It will give other companies the leeway to follow Yahoo!'s lead," says IAB Chairman Rich LeFurgy.

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