The Internet Runs on Ad Billions

Consumers enjoy a vast range of Web services, from e-mail to e-commerce, all funded by advertisers. Regulators tinker with this at their peril

From the basement of his house in San Francisco, Chris Lindland runs a successful specialty retail business that sells horizontal corduroy pants to customers across the country. Tim Carter turned years of hands-on experience as a building contractor in Ohio into a new career as Webmaster of "," a venture that in its first year netted him more than four times the income he earned in his best year as a builder.

And Dr. J. Glen House, a Colorado physician and quadriplegic, just launched, a Web community for America's 54 million people with disabilities (it's their initial focus as they build a "community" and share resources) that has logged more than 1.5 million unique visitors since October. These businesses could not have survived 15 years ago. They're thriving today because of interactive advertising.

Consumers today enjoy an extraordinary amount of cost-free content and services on the Internet. Search engines, e-mail, social networking sites, video and photo storage, product-comparison tools, news, entertainment, maps, job banks, and résumé services and e-commerce marketplaces are available at the click of a mouse—and free of charge. But none of these services are actually free. Advertising is funding them. And without this advertising subsidy, consumers would be forced to pay for many of these services, assuming they were available at all.

Advertising greases the wheels of the Web economy. Internet advertising revenues topped $21 billion in 2007, about one-third the amount marketers spend on national broadcast and cable television, according to the Interactive Advertising Bureau (IAB) and the Robert Coen Insider's Report. By 2011, that amount is projected to more than triple, to $62 billion, surpassing newspapers as the largest advertising medium, according to Veronis Suhler Stevenson's 21st Communications Industry Forecast, which came out in August, 2007. While Wall Street remains riveted to the multibillion-dollar acquisition sprees of big guns like Microsoft (MSFT), Google (GOOG), and AOL (TWX), Main Street increasingly is made up of entrepreneurial small businesses deploying digital advertising to bring new ideas for products and services to a national—and even a global—marketplace.

Starting Small, Chris Lindland's company, began in 2005 without a business plan, a marketing plan, or an advertising budget, but with an idea—to make corduroys whose wale ran horizontally as opposed to vertically—and a pair of pants to prove it. Encouraged by people's reaction to his special slacks, Chris and a friend, Enrique Landa, funded production of 40 pairs, which sold out fast. Knowing they were onto something, Chris and Enrique quit their jobs and launched, getting out the word of their distinctive product via highly targeted online advertising.

Spending only $200 to $300 per day on advertising, saw a 250% return in 2007 on its holiday ad expenditure over 45 days, increasing brand awareness and fueling strong growth of the return customer base. The company's early success has enabled to expand its product offerings to include several versions of the pants, as well as blankets and a reversible smoking jacket.

When Tim Carter quit the contracting business, his plan was to take his accumulated knowledge and expertise and become a syndicated newspaper columnist, offering advice to do-it-yourselfers. The problem was, he couldn't feed his family on the paltry income that publication in 30 newspapers provided. So Tim built a Web site and linked up with Google, both to draw traffic and to offer suppliers and builders the opportunity to advertise on his site, which draws 31,000 visitors a day who are hungry for information and expertise on home improvement projects.

With first-year advertising revenue of $350,000, Tim has been able to expand his business by hiring a video editor to help his site content to grow even richer and more in-depth.

Sure Aim is entrepreneurship on a slightly larger scale. The new Web community aims to reach the more than 50 million Americans with physical disabilities and functional limitations and combines the social-networking features of Web sites like Facebook with information of interest to its constituency: medical news, career advice, dating resources, and travel tips. The site has investors and has, in fact, gone public—but advertising is an essential element of its anticipated growth and success.

The company advertises online in a highly targeted fashion to attract people with disabilities who can benefit from the site, and accepts advertising for products and services relevant to people with disabilities. One of its most interesting advertising innovations is sponsorships, where companies including RE/MAX, Ford (F) and Johnson & Johnson (JNJ) create and sponsor new content for the site.

These small companies and thousands like them are proof that the ad-supported Internet has become the great equalizer, allowing anyone, anywhere with a better idea for a product or service to reach a national marketplace. Tinkering with this powerful economic engine—particularly in the guise of government regulation of interactive media and their core advertising technologies, as some are now recommending—could render the Internet both less efficient and less effective.

To those, I say, be careful what you wish for.

Before it's here, it's on the Bloomberg Terminal.