Do E Ads Have A Future?

The race is on to find ways to increase Internet advertising's effectiveness

A palpable tension hangs in the air, as three dozen Excite@Home staffers hunker down in a second-floor conference room, the blinds pulled shut to the Bay Area's chilly December afternoon. At the far end of an 18-foot mahogany table, a steady stream of execs from Internet startups march into the room, taking up the few remaining chairs. Each company eats up every nanosecond of its allotted 45 minutes, hoping to convince the skeptical audience that their technology can provide the much-needed spark to reignite Internet advertising.

For the Web portal, this is a critical meeting. With online ads declining in effectiveness, dropping in value, and failing to live up to their much-ballyhooed potential, Excite@Home is under intense pressure to come up with new, innovative ways of advertising. Nearly half of the company's forecast $653 million in 2000 revenues is expected to come from online advertising. But as an overhead screen displays a whizzy pop-up box that lets Net surfers view 360-degree images of an advertiser's product, including zoom and spin controls, it becomes clear from the gloomy faces around the table that there isn't much excitement in the room today. Even the usual kinetic energy of Susan Bratton, Excite@Home's 6-foot senior vice-president for sales and marketing, is subdued. "I didn't see anything that really pushed the envelope," she says. "The success of Net advertising is critical."

The clock is ticking for online advertising and the Web companies dependent on the dollars they bring. Money that flowed furiously into Net advertising from dot-coms has dried up faster than a 30-second Old Media ad. And traditional advertisers, still uncertain about how to value online marketing, aren't piling in fast enough to take up the slack. One reason for their hesitancy: The so-called "click-through rate," which measures how many people click on ads for more information, has fallen dramatically. Click-through rates on banner ads--billboard-like pitches that account for 50% of Net advertising revenue--have plummeted from 30% for the first banner ad in 1994 to a measly 0.3% today. That's well below the 1% to 1.4% response rate of direct mail. "There's a fear rising up into the boardrooms, and executives are concerned," says Jeffrey Mallett, president of Web portal Yahoo! Inc. "We're doing a lot more handholding and spending more time trying to help companies over the wall."

For all the effort, not enough companies are making it over. After rising nearly 100% annually since 1997, the growth of online ad sales is expected to nosedive to 17% in 2001--less than half what Merrill Lynch & Co. was predicting just four months ago. That means overall U.S. online ad revenue will hit only $9.7 billion this year, or 3.5% of total ad dollars. That's a paltry increase of three-tenths of a percentage point over last year and far short of what experts had predicted in the past. "It looks like online advertising is heading toward the low end of aggressive estimates that ranged from 5% to 20% of all U.S. ad spending," says Holly Becker, an analyst at Lehman Brothers.

Clawing for survival. It gets worse. Take out the 75% of online ad dollars that Yahoo, America Online, Excite@Home, and six other major portals capture, and that leaves thousands of Net companies fighting for what's left. As unsold ad space piled up, prices in the fourth quarter declined 10% to 15% for every type of ad. At the same time, e-mail marketing prices dropped 25%, to $150 per thousand messages delivered. At those rates, many Net publishers may soon find themselves clawing for survival. Already, entertainment site and free Internet service provider Corp., which both relied on advertising revenue, have shut down. Lehman Brothers estimates that it takes $200 million to $250 million in annual revenues for online publishers to break even--too big a nut for most. Apart from AOL, Yahoo, other major portals, and CNET, the Wall Street firm figures only 14 online publishers out of some 10,000 today will survive in their present form.

Already there are signs of more fallout. On Dec. 26, EarthWeb Inc. sold its ad-supported Web sites and e-mail newsletters, choosing to become a recruiting service for tech workers. The number of companies that have missed quarterly estimates, slashed staff, or been downgraded by Wall Street is piling up--including the likes of Yahoo, DoubleClick, NBCi, iVillage, RealNetworks, CMGI, and Ask Jeeves.

What's emerging from this wreckage is a new notion of online advertising that is less ad and more marketing. Unlike dot-coms who spent wildly on banner ads to bring consumers to their sites, companies like British Airways and Unilever see the power of the Net in a new form of virtual branding or digital direct mail. Through mini-sites with useful information or entertainment hooks such as games or contests, corporations are marketing their brands and products to consumers. Last year, H. J. Heinz Co., for example, set up a site that let kids send out e-mails of an exploding digital Heinz ketchup package. Teens latched onto the campaign, sending 50,000 of the "spurt" e-mails to one another in the first two months. Meanwhile, Cheseborough-Ponds USA Inc. has a site that features the Ponds Squad--three animated female characters taking on an evil-doer. In the first month after the site launched, Ponds sent out 200,000 product samples to those who asked for them. Rather than a direct mailing blast, Ponds reached an interested audience and saved 30% in costs.

To drum up interest in these cyber-campaigns, traditional marketers aren't even using the Net very much. Last year, when Miller Brewing Co. wanted to increase sales and brand awareness around the Super Bowl, it sponsored games and discussions on its own Super Bowl site. But rather than plastering ads on portals or sports sites, Miller relied almost entirely on TV and newspaper ads to alert people. End result? Miller dished out $9 million on traditional advertising to promote a $1 million online marketing binge. "It's like pizza and Tabasco," says Rishad Tobaccowala, president of ad agency Starcom, which designed the Miller campaign. "Pizza is offline marketing, and you spend more on that. To jazz it up, you add a little Tabasco, but a little bit goes a long way."

No wonder online publishers are feeling scorched. Now, they're scrambling to give online ads the kind of jazzy makeovers that work with the virtual marketing campaigns traditional advertisers are coming to favor. CNET, Disney Internet Group, and Primedia's are working on flashier ads with more information. Technology news site CNET, for example, designed a pilot ad for Dell Computer Inc. that's essentially a small Web site with product specs and forms for requesting more materials--without ever leaving the CNET Web page.

New technologies also are helping to provide more marketing punch. Streaming audio and video ads are being piped into downloaded music and video clips, as broadband connections slowly increase. RealNetworks, for instance, slips 15-second promos for Mitsubishi's Spyder convertible into video clips on the Comedy Central Web site. Others believe bigger is better and are opting for ads called "skyscrapers" that run the length of a PC screen. And pop-up ads, which must be clicked on to disappear, are gaining popularity.

New technologies alone won't cut it. Advertisers say better ways of measuring the impact of online ads and marketing campaigns are needed to get them to spend more. Now, Web site operators are sifting through how much time people spend on different areas of a site as a way to size up the impact of ads. That data, along with traditional surveys on brand awareness, are helping to get a better handle on whether online marketing dollars are well-spent. DoubleClick, for instance, is promoting its brand-measurement services, seminars, and case studies with clients such as Coca-Cola Co. "The more we can start integrating these kinds of things with the media buying, the more comfortable traditional advertisers will feel with the Net," says Barry Salzman, president of DoubleClick's Global Media unit.

Early days. Reaching that comfortable level will take time. Even one of the biggest online advertisers, Unilever, is feeling its way. The package-goods company, whose brands include Lipton, Snuggle, and Ragu, spends about $144 million annually--or 4% of its ad budget on the Net. In its fourth year of advertising online, the company says it's still learning how to make the most of its online marketing tactics, including e-mail, pop-up ads, and sponsorships of specific content areas on sites such as iVillage. "It's still very early days," says Mark Olney, vice-president of the North American Interactive Brand Center at Unilever. "It's a slow change, and where you hear some of the grumbles about why it's so difficult, it's because people think of the Net as being so very fast."

Increasingly, Unilever is experimenting with online marketing that would be too targeted for a 30-second TV spot. Dove, positioned as a soft, gentle cleansing soap, ran pop-up messages on parenting site BabyCenter, asking visitors whether they knew that Dove was recommended by pediatricians for washing newborns. Those ads got up to triple the response of traditional banner ads.

Clearly, some marketing plays best on the Net. To make a splash with its third car launch this year, Volvo decided to introduce its newest model, the S60, completely online. The extensive multimillion dollar campaign is being done through a partnership with AOL that includes mailing 500,000 CDs, co-sponsoring a sweepstakes for six S60s, and other promotions throughout the online service. Since the Oct. 15 launch, about 21,000 people have configured cars online and asked for quotes, and 3,000 cars have been sold. It will be months before Volvo really knows whether the money was well-spent, says Phil Bienert, manager of e-Business at Volvo Cars of North America. "About 85% of our customers are currently online," he says. "It's a number we think is an advantage. This is an opportunity to prove that out."

So far, online publishers are making only modest gains. Companies such as Visa International and British Airways are standing pat on their online ad spending. "To get me comfortable about investing more, I would need to believe I could accomplish my broader brand-building objectives as effectively as the medium I use now, which is TV," says Liz Silver, senior vice-president for advertising at Visa, which spent $10 million online last year, according to researcher Competitive Media. Despite the latest innovations, online publishers still have much work to do before winning over skeptics like Silver.

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