Internet Advertising Analysis

This report is intended to gain an insight into Internet Advertising and Online Advertising Strategy. This report, even though old, was originally published by the research department at Morgan Stanley Dean Witter Equity Research, however, its content was never indexed by Google, meaning you could not find it by doing a search in Google under Internet Advertising or under any keywords. This time we hope that the great content of this report can get a chance to get indexed by Google so everyone can benefit from its great content.

The debate as to how successful Internet advertising is consists of two separate issues: branding vs. selling and impressions vs. performance. Is Internet advertising capable of branding? Yes, and here is why:

Internet ads are relatively simple to create. Even rich media banner ads are still simple for most programmers to create. Yet even the most simple banner ad is a tool for creating brand awareness. Internet ads are relatively inexpensive to develop. Not only are banners much less expensive to create than television or radio ads, but they even put direct mail to shame; and then there is the low cost of e-mail compared with traditional mail. Jupiter Communications estimates that a direct marketing campaign on e-mail costs about $0.01–0.25 per piece, versus $1.00–2.00 using traditional mail. Internet advertising is easy to update as conditions change. Internet advertising is easier and faster to test. A wide variety of creative content can be tested in matched cell tests so as to come up with the most effective approach as quickly as possible. Internet advertising promises real-time interaction with consumers.

Not only are customers developing brand awareness from Internet advertising, but they are also able to link directly to the seller’s Web site and purchase a product. Internet advertising can compress the sales cycle into one interaction with the customer (information gathering, further research, company contact, and sale). No other medium can boast this kind of customer interaction. Payment for Performance and Impressions Advertisers on Internet are pushing for more quantifiable results. Cost-per-click, cost-per-lead, and cost-per sale are different ways of quantifying results, and advertisers are pushing Web publishers to use more performance based pricing. Web publishers retort that they don’t control the creative content, nor what happens once the consumer clicks on the ad and is taken to the advertiser’s site. For this reason, Web publishers prefer to be paid on the basis of impressions (cost per thousand impressions, or CPM, is the most common such technique). Even if consumers don’t click on an ad, publishers argue, branding is occurring and the site should be compensated.

In addition, Internet allows for targeting by individual browser as well as by context or demographic. Internet is able to target specific messages to individual browsers or e-mail accounts. It can also work like other media that narrow cast contextually to households in particular demographics. Internet allows advertisers to access valuable background information on consumers through the use of cookies, click stream tracking, domain name recognition, and other means. The three major actions performed online: research, browsing, and purchasing all leave behind electronic trails of demonstrated interests that are incredibly valuable to advertisers.

Internet produces a transactional database. By collapsing the ordering, billing and payment cycle into an integrated process, Internet improves payment and lowers cost while maintaining an updated transactional database. Early data indicate that Internet may prove to be more effective than traditional media in direct response advertising. Proof of such effectiveness may result in upward pressure on Internet advertising pricing and downward pressure on traditional mass market advertising pricing.

Be Aware of The Falling Click-Through Rate; Consumers who were once “surfers” are evolving into “searchers.”

As happened to the catalog industry, Internet advertising market is suffering a severe decline in responsiveness. The first banners were displayed in 1994, and received a click-through rate of about 10%. From there, it has been all downhill; CTRs fell to 2–3% in 1996–97. 1998 saw CTRs reach 1%, and as of today they have fallen even further; we estimate today’s CTRs to be in the 0.4% area. However, the best banners still garner CTRs over 10%, sometimes reaching over 15%. Meanwhile, we still do not have an effective measure of “click-through rates” for other media, although companies like Wink Communications will give some insight into the CTR for television commercials soon.

The reasons for the falling click-through rates are relatively simple. Internet users are becoming more discriminating. They are also generally not using Internet as entertainment (like most TV, the easiest comparable), but rather as a tool to gather information, communicate, etc. Taking time out from whatever task is being pursued to click on an ad is the exception, not part of the typical user’s game plan. The newness of the Web has also worn off, causing consumers to be less fascinated by advertising.

Television is the most similar media in appearance to Internet, and as such, comparisons are inevitable. However, if one compares the creativity, action, audio, and excitement of a television ad with those of an Internet ad, there is no comparison. Current Internet ads may be boring to some, but the emergence of more active video and sound will make them more appealing (and interruptive?). The smart marketers are really not paying much attention to click-throughs anymore ... CTRs are a misapplication of the accountability of the Net. Just because you can count click-throughs doesn’t mean it’s the right thing to count. Several studies have shown that a high click-through rate is not necessarily a sign of a high conversion (or sales) ratio.

In fact, the correlation between click-throughs and sales is loose at best. AdKnowledge reports that the campaigns generating the highest click-throughs generate the most conversions only 14.3% of the time. That means that 85.7% of the time, the campaign generating the highest CTR generated a lower conversion rate than other campaigns with lower CTRs. Clearly, click-through rates are a poor measure of sales and thus performance. Studies have shown that a high click through rate is not necessarily a sign of a high conversion or sales ratio. CPMs: The Rate Card Impressions, which are so important in the offline world (particularly when used in calculating the CPM), are difficult to quantify on the Web.

Television and radio are intended to entertain consumers. In contrast, Internet is used for a mixture of business and personal communication, research, and entertainment purposes. This will likely impact how receptive consumers are to Internet advertising. Compared with traditional media, Internet has a very small level of advertising content. Newspapers are traditionally 62% advertising and 38% content. Magazines are 52% advertising and 48% content. Television is about 25% advertising and 75% content. At 9% advertising and 91% content, according to eStats, Internet currently has a lower percentage of ads than all of these traditional media. The free ISP model may change Internet’s ad/editorial breakdown for many users. By our rough calculations, when a free ISP’s continuous banner/toolbar is displayed on a user’s screen, the ad content could increase to about 20%.

Internet is now more like broadcast television than cable television in its lack of subscription revenue for programmers, as search engines sprang up, allowing users to better navigate the Web. Because nearly everyone was lost in cyberspace, nearly everyone used search engines. Now, instead of focusing on niche content sites, advertisers could obtain a broad reach by placing ads on search engine sites.

Advertisers have come to embrace Internet and search engine marketing on Internet, and although some are still scratching their heads, no one believes they can continue to ignore it. Internet is neither a cluster of cable channels nor several large broadcast networks. Rather, Internet offers advertisers the opportunity to follow both broadcast and cable television strategies. Advertisers can gain broad reach as well as target specific demographics. And just when advertisers started to think they had this “Internet Thing” figured out, the Web evolved, again. Search engines became not simply directors of traffic, but also destinations for traffic. “Portals” are distinguished from search engines (although most have a search engine ability) by their aggregation of content; they serve as people’s jumping off points on the Web and as their destination. To become a destination, portals grouped their content sites into channels that appeal to different groups of users. Thus, two users might both start at the Lycos portal, but each would pursue a different channel of content within Lycos’ complete offering of Web properties. Advertisers quickly discovered the advantages of the new model by transacting with the largest portals. In this manner, they could purchase broad-reaching advertising on the opening portal pages, plus specific, demographically targeted advertising on selected channels or sites within the portal. Because of these advantages, and because users flocked to the aggregators for the same reasons advertisers did, advertisers focused their spending on the largest portals. Internet: Networks of Networks, Networks of Sites The largest portals serve as networks of channels on which advertisers display their messages. Content aggregators portals purchased niche content providers to develop their networks of channels.

This was one means for smaller, less trafficked sites to share in the advertising of Internet. Many of the smaller sites felt that they needed to link up with large portals, or they would be left to fend for themselves to secure advertising. From this sprang the advertising network. Media sellers, such as DoubleClick, 24/7 Media, and Engage, formed networks of sites. By forming networks that resembled those of the portals, the media sellers could offer something to both advertisers and the sites in the network. Ad networks gave advertisers the ability to target broadly across all types of sites, narrowly on channels of sites, and more specifically on particular sites. This is called run of network, run of channel, and run of site advertising, respectively. The sites on the network gained most of the advantages of being part of a portal without actually joining one access to more advertisers and their dollars.

The three categories that we see dominating Internet advertising going forward are:

1) Considered Purchases: These are goods or services that require research before a purchase is made. Automobiles and travel are two such areas, as consumers are apt to do extensive research before purchasing these high-cost items.

2) Highly Varied Items and Services: Items for which many different variations exist are likely to be advertised heavily on the Internet. Jobs fit this category, as consumers can use the Internet’s search abilities to dig deeply into databases to find what they are looking for.

3) Electronic Delivery Services: Services that can be conducted electronically will also be big advertisers on the Internet. Financial services, insurance, and credit card issuers fit this category.

Attractive Demos Internet users have some very appealing demographics for advertisers. The typical Internet user is in one of the more coveted age groups: 32% are between the ages of 35–44 and 23% are 25–34, according to eMarketer. More important than age groups to advertisers, Internet users have money! 29% of users earn $50,000–75,000 a year, and 18% earn over $100,000 per year, according to Jupiter Communications. While 18% of Internet users earn over $100,000 annually, only 13% of the general U.S. population earns that much. Only 21% of the general population falls in the $50,000– 75,000 range, compared with 29% of Internet users. Interestingly, the bottom end of the spectrum (those earning under $30,000) are also over-represented in the Internet population. Best of all for technology advertisers, Internet users are early adopters of technology and (obviously) have access to a personal computer, making them ideal for certain types of technology advertisers.

1. In the next 6 years we expect Internet to increase its share of advertising nearly 5-fold.

2. The global market for advertising and marketing services is enormous. We expect approximately $678 billion in 2000. Should Internet get just 12% of this market, it would reach $81 billion globally.

3. New data-driven, ROI-obsessed companies are being created that are attacking this significant and growing opportunity by building impressive knowledge bases. The insight bred in these knowledge bases increases exponentially as the companies apply technology to harness the tremendous amount of data created by all those clicks. We expect that the leaders will generate sustainable advantages for their clients and for their competitive position. As a result, some of these companies will create significant market capitalizations for investors.

4. The power of these new companies may fragment the power of the top advertising sites. Sell-side ad networks and buy-side media buyers may be able to create synthetic networks that “spread the wealth” to a wider range of “top sites” as long as they offer better ROI for marketing dollars than the current top sites do. Wherever the eMarketing specialists find the best value for advertisers may also be the best place for investors.

5. Internet did not invent direct marketing, but it may fulfill its dream of accountability and ROI. Internet helps eliminate some of advertising’s limitations and turns it into more of a science. By running a number of matched cell tests to determine the most effective creative, best ad sequencing, and optimal number of ad exposures for a given prospect, the marketer can use precision targeting and cross-selling to iteratively optimize campaigns based on real-time changes in marketing conditions in Internet Advertising and e-mail.

6. Long–term, Internet advertising may be the most expensive on a CPM basis, have the highest power ratio because of its efficiency in targeting and still be the best value for marketers.

7. If there is eventually a zero-sum game among media, newspapers seem to be the most vulnerable to Internet threat. With higher ad pricing and power ratios than other media, newspapers may have the most to worry about. We may soon move from a stage in which everyone wins because Internet usage is incremental to more of a zero sum battle for share of time and ad spend.

8. The “tail may wag the dog” information gleaned from interactive advertising may determine decisions on pricing, positioning, and promotion in other media. Although we do not forecast Internet to become the largest advertising medium, it could be the most important. The immediate feedback and iterative process of Internet Advertising is likely to create intelligence on the pricing, positioning, and messaging across all media.

9. Privacy issues are at a sensitive stage right now. E marketing companies must be sensitive to the concerns of consumers and legislators regarding privacy in all of their host countries. As Internet creates and tracks databases of transactional, behavioral and contextual information and as this information is linked to other data we already have privacy concerns will be aired at the national and state level. In the worst case, cookies could be demonized and be made “opt–in,” reducing (but not eliminating) the ability to target advertising, personalize content, and improve customer service. Even in this worst case, however, Internet Advertising and direct e-mail will offer the best targeted marketing medium, just to a lesser extent.

10. Broadband promises to deliver rich media which allows marketers to get beyond banners and use sound and motion for more creative commercial offers that generate higher response rates. This means better pricing, larger budget commitments and a greater opportunity for well-positioned eMarketing services companies, providing another wave of opportunity. While still hard to quantify, some analysts point to broadband as another cable TV business in the making. To put this in perspective, in the U.S. national and local cable systems represent $11 billion in advertising, about 7% of the total. Additionally, a convergence of TV/Internet and wired/wireless appliances may lead to convergence in interactive marketing plans.

Please continue with:

Part 2; the importance of Power Ratios , Part 3; new Media vs. old Media , Part 4; Media and Internet Use , Part 5; Impression Measurement, Internet Advertising Metrics,

Part 6 ; Calculating CPM and CPM Pricing , Part 7; Effective CPM is currently the only statistic on which comparisons can realistically be based ,

Part 8; New Vs. Old Media: A Big Market from Which to Gain Share , Part 9; Internet Advertising; Right type of Medium and Targeting ,

Part 10; Broadband brings Rich Media , Part 11, Rich Media Studies , Part 12; What Could K.O. Internet Advertising? , Part 13; Email ,

Part 14; Advertising or Direct Marketing? , Part 15; What Does Internet Advertising Market Consist of? , Part 16; Rich Media still has some drawbacks ,

Part 17 Inventory and Concentration , Part 18; Market Share and Concentration Data , Part 19; Global Impact, Part 20; Residential and Business Use ,

Part 21; Pageviews , Part 22; Advertising vs. Direct Marketing , Part 23; Investment Conclusion

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