Commentary: The Future of Advertising

Advertising was supposed to be the gold paving the Internet's busy streets. Consumers would eagerly surf, chat, and shop, and ads would pay Web companies for providing all those cool sites. In return, marketers would flash brightly colored banners at viewers, entice them to click through to their own sites, and get lots of business. But it didn't happen that way. Today, banner click-through rates have plummeted to a tiny 0.1%, ad rates may be heading from $33 per thousand-page-requests a year ago into the single digits, and ad volumes are falling. The blowout is pushing even the best-known sites down financial black holes.

What went wrong? It turns out that the Internet opened up brand-new worlds for advertisers, only they didn't see it. They tried to do what they always did--post their names in big letters, build their brands in two dimensions. But they didn't seize on the Net's potential or exploit its unique characteristics, like the ability to target individual preferences and engage customers in interactivity. "This is the true value of what the Internet provides marketers," says Christopher Todd, analyst at Jupiter Media Metrix.

Web operators that based their businesses entirely on the expected free flow of ad dollars are learning that the hard way. "No longer can anyone in this space rely on only one revenue stream," warns John Fullmer, CEO of Internet direct marketer But those whose more nuanced approach has kept them alive may yet reap benefits as marketers get smarter about the Net. For starters, advertising hasn't all dried up. Much of the current ad decline is due to the flameout of dot-coms that spent wildly online to build their new brands. "The kindling has been burned through," says Tim McHale, chief media officer of Tribal DDB Worldwide, whose clients include Anheuser-Busch (BUD ), McDonald's (MCD ), and Volkswagen (VLKAY ). Traditional marketers may be cutting back, but they're not bailing out. A few, like IBM (IBM ), are even ratcheting up their Internet ad budgets.

MARKETERS' MALL. But this time, it will be different. It's now clear that folks are getting as good at screening out online banner ads as they are at tuning out TV commercials or flipping past glossies in a magazine. So companies are finding ways to reach eyeballs without glazing them over.

Some advertisers are ditching banner ads totally, instead using old-fashioned TV spots to drive traffic directly to their Web sites, rather than through intermediaries like portals. Other companies are signing up with sites that essentially pay consumers to engage with a mall full of marketers. At, for example, surfers collect points and prizes for agreeing to visit companies' sites, read their e-mail, or buy their products online. Another tack: bidding for prime spots on search engines. By paying to top the list of results for users who search for, say, "banking" on, a marketer such as Citicorp (C ) ensures it is reaching live prospects. A study by researcher NPD Group Inc. shows that a top position is three times more effective than a banner ad in building brand awareness on a search-engine site.

And even though they're taking the biggest hit right now, banner ads aren't going away--just as roadside billboards didn't disappear once such alternatives as TV arrived. Web sites are now willing to offer advertisers more shapes and sizes to play with, pop-up ads are developing a following, and the rollout of broadband will bring streaming videos with grabbier messages. And while banner ads could capture some data about clickers before, agencies are helping marketers track customer profiles more minutely. Avenue A Inc., for example, is working with client Inc. to identify whether a visitor directed to its site by a banner ad has ever visited the site before, has visited but not purchased anything, or has purchased goods there many times.

Still, plenty of pain is in store for ad buyers and sellers groping their way around this new medium. "We keep turning up evidence that this works, but we need to get through the slowdown," says Avenue A CEO Brian P. McAndrews. For the survivors, there still will be gold in Webland.

By Gerry Khermouch and Tom Lowry

Gerry Khermouch writes about marketing, and Tom Lowry covers media, from New York.

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