Internet Advertising Analysis Part 12; What Could K.O. Internet Advertising
Privacy Concerns Are Gaining Momentum and Will Not Go Away Any Time Soon
Web publishers and buy/sell-side networks usually place certain informational text files called “cookies” on a user’s hard drive without the user’s knowledge or consent. Agencies use cookies to identify users and target appropriate ads to them. This can also help in limiting the frequency with which the user is shown a particular ad. If legal restrictions reduce the effectiveness of cookies, significant reengineering resources may be required for ad targeting.
This would mean that Internet ads would have to be contextually placed, based on aggregate demographic group behavior (as is the case on television), rather than individually targeted based on personal behavior. Advertisers could also target based on the ISP of origin and other such factors. Internet browsers allow users to modify their browser settings to remove or prevent cookies. In the offline world, many companies have just as much information (or more) on consumers particularly the credit card companies. In the U.S., we believe that the ability to eliminate or block cookies by opting out of ad targeting programs, combined with clear privacy policies posted on Web sites (and an acceptance of just how much information offline companies already have on consumers), will mollify most users. Overseas, however, privacy concerns seem to playing a larger role. For example, the European Union has adopted a directive addressing data privacy that may result in limitations on the collection and use of certain information regarding Internet users.
Also, Germany has imposed its own strict set of standards, limiting the use of cookies. Internet users’ privacy concerns peaked with the announcement that DoubleClick was being investigated by the Federal Trade Commission’s (FTC) Bureau of Consumer Protection. This is not the same bureau that covers Antitrust/Competition. The Bureau of Consumer Protection’s mandate is “to protect consumers against unfair, deceptive, or fraudulent practices.” The Bureau enforces a variety of consumer protection laws enacted by Congress, as well as trade regulation rules issued by the Commission. It is common for such an investigation to take 6–12 months, and it may include investigations into other companies related to DoubleClick’s business. In the worst-case scenario, the Internet goes all opt-in. Several federal bills regarding privacy are under way in the U.S. House and the U.S. Senate, but with very few legislative days left in the shortened election year, it is unlikely we will have legislative resolution. In the worst-case scenario, the Internet goes all opt-in, as the most controversial legislation, written by Senator Torricelli (D-NJ), calls for. What does this worst-case mean Users who choose not to opt in will not have cookies placed on their hard drives, and therefore will likely receive repetitive marketing messages. Others will opt in, creating a panel of users on whom data could be compiled; online advertisers could extrapolate from that data to do effective targeting. For those who fail to opt in, targeting would be based on the ISP of origination and the content of the Web page visited.
Finally, in order to increase the percentage of opt-in, sites and their marketers will need to offer sweepstakes and other benefits to entice consumers. Even with the most basic tools, we believe the long-term value of Internet advertising can rise from its current power ratio of 80% (similar to TV) to around 300% (similar to magazines). What does that mean in English We believe that Internet advertising’s pricing power may triple without cookies... and could possibly be higher with them. State legislatures and Attorneys General say “Don’t Tread on Me.” Privacy is very much a state issue. Many on Wall Street and in Silicon Valley miss this point, thinking that government begins and ends in Washington, DC. Underlying the states’ interests in this area is the most recent federal legislation on financial services, which devoted an entire section to privacy. In the excerpt noted below from the Gramm-Leach-Bliley Act, Congress permitted the states to propose more restrictive privacy rules.
Gramm-Leach-Bliley Act Became Public Law No: 106-102, 11/12/1999. An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes. TITLE V--PRIVACY Subtitle B--Fraudulent Access to Financial Information SEC. 507.
RELATION TO STATE LAWS. (b) GREATER PROTECTION UNDER STATE LAW-
For purposes of this section, a State statute, regulation, order, or interpretation is not inconsistent with the provisions of this subtitle if the protection such statute, regulation, order, or interpretation affords any person is greater than the protection provided under this subtitle and the amendments made by this subtitle, as determined by the Federal Trade Commission, after consultation with the agency or authority with jurisdiction under section 505(a) of either the person that initiated the complaint or that is the subject of the complaint, on its own motion or upon the petition of any interested party.
Some state legislatures and attorneys general have taken this permission as a mandate. In the State of Washington, the Attorney General has vowed to be the first to act on this “permission.” Investors should expect a crescendo of state activity from now until next year, with a number of omnibus privacy bills and ballot initiatives considered. Accounting Standards Gross vs. Net Revenue Recognition Accounting standards questions have been a hot topic among Internet companies. On December 3, 1999, the SEC issued Staff Accounting Bulletin (SAB) 101 on accounting for revenue recognition to clarify current principles for recognizing and reporting revenue. SAB101a was recently released to extend the deadline for compliance until 2Q00. Although the SAB covers a wide range of issues regarding revenue recognition policies, the key area that could affect Internet advertisers is the gross versus net revenue disclosure.
In areas where it is unclear whether the gross revenues should be reported with a separate display of cost of goods sold to determine net sales, the SEC staff puts forth the following requirements: The staff considers whether the registrant:
(1) acts as principal in the transaction,
(2) takes title to the products,
(3) has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and
(4) acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis. If the company performs as an agent or broker without assuming the risks and rewards of ownership of the goods, sales should be reported on a net basis.
Managements claim to satisfy all of these conditions, yet should FASB disagree, companies could have to restate historical revenue and could have to report something closer to net revenues going forward. A FASB decision that goes against a company’s accounting policies should not change profitability projections or any other part of its business. However, should it result in a lower level of revenues, investors relying solely on revenue multiples for valuation may reduce the value of the stock and this could impact strategic decisions at the company. This could hurt the stock considerably and could have a negative (but uneven) impact on a number of names in the Internet advertising sector.
Barter revenue accounting is another area that has caused concern. Bartering occurs when two Internet companies exchange advertising space on their Web sites. The SEC finds fault with the fact that these companies sometimes report revenue earned for the ad and marketing expense for the bartered ad. Forrester Research believes that about 8% of reported Internet advertising revenues are barter revenues that should not be counted. Although most of the Internet advertising agencies would not be affected, a crackdown by the SEC on barter revenues could be a modest negative for the industry. Ad-Blocking and Cookie-Cutting Software Ad-blockers allow for a “free ride” and some claim it could be faster, too. To date, $20 off-the-shelf software by companies such as AdSubtract.com and Symantec Corp. has not proved too popular.
This could change if the adblockers allow for faster Internet access, as some makers of such software claim. Other media have “ad-blockers” to deal with, too consider the early models of TiVo and Replay for television. Of course, since few subscription models have worked on the Web, blocking the ads inevitably leads the content distributor to block the content not a good plan for an ad-supported media. Finally, ad-blocking software is far from perfect; some ads slip through and some content is blocked. Cookie cutters allow users to remove cookies, or stored identification markers, from their hard drives. This causes users to appear as completely new identities to Web sites. Ad servers, unaware of a user’s identity (and thus, preferences) will serve contextual ads to users who have cut their cookies. At the same time, sites will not remember user’s passwords, preferences, and ordering details, thus restricting convenience and detracting from the user’s experience.
Direct E-Mail & the Anti-Spam Culture of the Web
Direct e-mailers have become very wary of being associated with “spam.” They have tried to make their marketing programs invitations to buy, with very easy opt-out methods if a user wishes to unsubscribe to future mailings.
They have also utilized previous offline relationships with brands to build new opt-in relationships. Clearly posted privacy statements and the ability to opt out of an ad targeter’s program are important means of empowering consumers. Still, a Web consumer backlash could be ignited by a relatively small number of people angered by one careless or unlucky incident so investors beware. Once Internet household penetration becomes more ubiquitous, however, we do not believe the average customer will be shocked that there is e-commerce going on in their e-mail box.
Declining Click-Through Rate
A continuously declining click-through rate on the Web could lead advertisers to look unfavorably upon Internet advertising ... even though they do not know the “clickthrough rate” of other media. Although most admit that the click-through rate (CTR) is not the best measure of an advertisement’s effectiveness, it is easily quantifiable and may be cited by advertisers as proof of a campaign’s success or failure. For every study that shows a decline in CTRs the percentage of people who click on an ad there is one that refutes the importance of that measurement. Not everyone agrees that the banner format itself is the problem; rather the way banners are created and used is the issue. “It’s more a case of bad banner ads, just like there are bad television ads. The space itself has huge potential. You can have people register, there are pulldown scripts, you can play games.” Mike Windsor, President of Ogilvy Interactive However, some of those who believe that banner ads are the problem point to emerging formats with higher CTRs as likely future Internet advertising applications.
Unicast’s superstitials are Java-based pop-up windows that are supported by DoubleClick, Engage and 24/7 Media and are designed to be minimally intrusive and polite. “The Superstitial is a pop-up on steroids. Superstitials have far exceeded our expectations.” Sean Black, VP and Interactive Media Director, Grey Direct Interactive Additionally, CTR information is currently available only for Internet advertising. Over time, interactive television will give us another medium’s CTR and allow for comparisons. Finally, it is important to realize that CTRs, look-to book ratios, and response rates all boil down to ways to create a medium’s clearing price for its advertising. Where Wall Street Crosses Madison Avenue At some point, investor sentiment in the Internet space may take a turn for the worse ... and this could affect advertising. While a lot of overvalued companies may justifiably falter, we worry that some of the good companies and their services will also be hurt should investor sentiment turn negative. Analysts have sought to address this by using short-term conservative assumptions and long-term aggressive assumptions. However, should this dichotomous approach to forecasting appear to produce expectations out of line with evolving reality, many Internet advertising stocks could be unjustifiably hurt. As “the most measurable media ever,” the Internet has a lot of promise to live up to.
Category Profile: Buy Side Advertising Representation Firms
Buy side ad rep firms distinguish themselves by representing advertisers in their negotiations with Web publishers. Buy side firms are able to track Internet users across different networks and serve them ads wherever they may be on the Internet. Many Internet ad agencies have expanded their services from offering strictly creative work to offering full consulting services for companies trying to make it online.
Category Profile: Sell Side Advertising Networks/Ad Servers
On the sell side, ad networks represent Web publishers in negotiations with advertisers, somewhat similar to rep firms or synthetic networks. Ad serving is becoming increasingly important, as data on Internet users is used to target advertising to likely consumers. The size and depth of the databases used by ad servers will be critical in differentiating the winners and losers of online advertising.
As in the offline media world, the online media business has both a buy side and a sell side. On the sell side, agencies and networks represent Web publishers in selling Internet ad inventory (the ad networks described earlier). It is the sell side’s job to negotiate the best deal (i.e., most money) from advertisers for the publishers they represent. On the buy side, agencies try to get the best deal for their customers the advertisers. Sell-side ad networks can provide advertisers with access to only a limited number of sites those in the network. For instance, DoubleClick cannot serve ads to or monitor users who are on AOL’s sites.
Thus, they are unaware of what ads a user has been served and how they have reacted. Nor can sell-side networks target advertisements to users who do not enter their network of sites. Buy-side ad agents essentially produce a custom network for advertisers. This is possible because they represent advertisers’ not publishers’ interests in negotiations. Buy-side agencies are independent of any Web publisher or advertising network. Thus, they are able to focus on the needs of Internet advertisers, rather than Web sites that sell advertising or advertising networks representing sellers of Internet advertising. Targeting Targeting is based on data acquired from prior interactions with users. This comes from a user’s interaction with the buy-side client’s Web sites and from a user’s responses to past advertisements. For instance, an Internet user who visits Jeep’s Web site to look at the Jeep Wrangler could be served an advertisement for the Wrangler anywhere on the Web. Similarly, an Internet user who clicks through a Jeep ad to gain more information may be served a Jeep ad again. Sell-side ad serving systems enable advertisers to control the frequency with which an ad is delivered regardless of where the user sees the exposures.
This is highly important, as it has been established that if a user is going to respond to an ad, it will be within the first several exposures. Except for branding value, additional exposures are wasted. If advertisers contract directly with publishers or sell-side ad networks (like DoubleClick, Engage, or 24/7 Media), they run the risk of wasting advertising, since publishers have no ability to control the frequency of ads outside their own networks. Sell-side ad shops track users at every exposure to a client’s ad. They can thus control the frequency with which the user sees each ad. If a user has seen an ad three times on Yahoo!, then shows up on CNET, the company knows that s/he has already seen the ad, and will deliver a different creative at the fourth exposure. Advertisers often design a sequence of ads intended to reinforce their brand, then request an action. Buy-side firms enable advertisers to determine the sequence in which they’d like users to see the ads, then execute this plan.
Ad Servers
Ad networks are basically groupings of sites that have banded together to present a united front when dealing with advertisers. In this way, they gain the benefits of a wide-reaching portal. Relatively obscure sites can bargain for media pricing from a position of strength when they are part of a network. Typically, ad networks conduct ad serving for their affiliated sites. Ad serving is largely a technology job. When a user goes to a Web site, the site queries its ad-serving partner about which ads to deliver based on the user’s profile. The adserving partner serves (sends) the selected ad back to the Web site.
A few sites have chosen to do this on their own, but the vast majority outsource the serving job to third-party ad servers. We believe that as greater targeting ability is developed, third-party ad servers will be even more critical. Today, 61% of sites use some combination of internal and external ad serving. We expect this number to continue to climb as more targeting comes online and more rich media is demanded by advertisers. Tracking Internet commerce trackers and marketers believe that every Internet transaction generates ten times as much information on consumers as an offline transaction. The good ad trackers are able to monitor this clickstream of data and assemble it into a user profile. With individual user profiles developed through clickstream tracking, targeters can better serve appropriate ads to consumers. Tracking has been going on in the offline world for some time. Individual stores monitor consumers’ purchases and try to target their specials to those consumers who may be interested. The online world takes tracking to a whole new level, particularly if the Internet bridges the online and offline data. Data Is the Key! For an advertisement to be targeted, there must be data on consumers behind it. The richer and more in-depth the data, the better the targeting. In general, data are divided into behavioral and demographic data, although geographic is also starting to enter the scene as local Internet advertising catches on. Behavioral data can be further broken into transactional and intent-to-purchase data.
• Transactional Data: The most important form of data is transactional data. A form of behavioral data, this is a history of what consumers have purchased in the past. Advertisers can then market complementary products to consumers with this information.
• Intent to Purchase: Data on a consumer’s intent to purchase are nearly as important as the purchases themselves. Using this form of behavioral data, ad targeters are able to monitor what consumers have read about, requested more information about, or nearly purchased. With this information, they can offer special prices to consumers who turned back on a sale at the last moment because of the price or for other reasons.
• Demographic: Demographic data are based on a broad categorization of consumers. Ads are targeted at users based on their demographic group. For instance, males age 18–24 may receive football advertisements. Demographicbased advertising depends on broad assumptions, making it much less likely to generate a response than ads using behavioral data. Targeting Targeted advertising on the Internet is still in its initial stages. In our view, Internet advertisers are rich in data, but poor at using that data for targeting. We have divided the development of Internet ad targeting into three time periods:
• Building the Database: From 1994 to 1997, as the Internet morphed from a nerd hangout to a mainstream medium, advertisers came to realize that they had a treasure trove of information waiting to be mined. Vast amounts of data on consumers were available, and more was being added by the second. Advertisers focused on mining the data on Internet consumers and developing databases to store it.
• Manipulating the Data: From 1997 through 1999, advertisers and Internet ad targeters have focused their efforts on manipulating these troves of data. Demographic data have been widely used to target advertisements, but using behavioral data as a targeting mechanism is still in its infant stages.
• Targeting Customers: Now that advertisers, database companies, and ad targeters have developed their databases, they are focusing their efforts on targeting ads based on demographic, behavioral, psychographic, and even geographic information. Today, Internet ad targeting is moving from targeting based solely on site content an estimate of the demographics of a typical viewer of that site to targeting based on specific user data. However, numerous studies have shown that the vast majority of sites are still not tracking users’ clickstreams.
Closed Loop Marketing
Closed-loop marketing involves clickstream tracking and then targeting based on this information, in virtually real-time. Ad networks using this method track when users enter their network of sites, where they click, what ads they have responded to, what information they have requested, and what purchases they have made. With the information generated, closed-loop marketers are able to constantly refine their campaigns to generate the best possible results. In the offline world, advertisers must wait until consumers make a purchase to be able to see their behavior. The Internet has turned this upside down, however. Now, the advertiser can track a consumer’s behavior prior to a purchase and can actually facilitate that purchase through the use of targeted advertising.
Advertising Campaigns: From Broad to Narrow
On the Internet, advertisers can choose to reach a broad audience or a more narrow selection of users. Within both the broad and narrow audiences, the ad can be targeted, which distinguishes the Internet from other forms of advertising previously available.
• Run of Network: A run-of-network campaign runs across a media seller’s entire network, similar to the broad reach enjoyed by network television. However, on the Internet, even though the ad is run across the entire network of sites, it can still be targeted to specific users based on the available data.
• Run of Channel: A run-of-channel campaign runs on a portal or network’s distinct content channels. For instance, pet food maker Iams may advertise across Yahoo’s network of pet sites. Within the channel, the Internet allows further targeting based on users’ demographic, psychographic, or geographic data.
• Run of Site: Currently the most popular form of advertising on the Internet, a run-of-site campaign runs only on a particular site’s pages. For example, one could advertise only on the New York Times’ site.
• Profile Targeting: Advertisers have recently been offered the option of targeting a campaign at a user with a particular behavioral history.
As of now, these profiles are anonymous, but marketers may try to link their online and offline data in the future. As in the offline world, seasonality can influence an advertiser’s choice of medium. More broad-reaching advertising, such as run-of-network campaigns, seem to be favored in holiday seasons, while more targeted forms like run-of-site campaigns dominate the rest of the year. Affiliate Marketing Affiliate marketing is the business-to-business version of viral marketing. Marketers pay affiliates to lead consumers to their site. Jupiter Communications predicts that affiliate programs will account for 24% of e-commerce revenues by 2002, up from about 11% in 1998. The granddaddy of affiliate marketing is Amazon.com. Affiliate members feature a link to Amazon’s site usually a button on their own sites. When a user purchases anything on Amazon’s site after having gone there via the link, the member who sent the purchaser to Amazon receives a commission.
In general, there are three types of affiliate marketing programs, distinguished by their payment style:
• Impressions: Affiliates are paid when they present a banner to a consumer.
• Click-Throughs: Affiliates are paid for each user that clicks through the banner or button.
• Lead Generation: After a consumer has clicked through to a site, the affiliate is paid if the marketer is able to register the user.
• Revenue Sharing: The affiliate is paid only when the referred consumer makes a purchase. Agencies or Consultants Many Internet advertising agencies have expanded their services as opportunities on the Internet have expanded. Initially, companies like ModemMedia and Razorfish offered only creative marketing solutions to their clients. These “e-consultants” have since expanded their offerings to include Web site development, Internet business planning and e-commerce development, in addition to Internet marketing. Companies included in this space are: Sapient, MarchFirst, Viant, Scient, Organic, Agency.com, Razorfish, ModemMedia, and others. Additionally, many of the large “traditional” agency holding companies like Omnicom, Interpublic Group, Young & Rubicam, True North and WPP Group have stakes in these e-consultants. COMPETITORS: DoubleClick DCLK Engage ENGA L90 LNTY Phase2Media Private Real Media Has filed to go public 24/7 Media TFSM
Category Profile: Direct (E-Mail) Marketing
Direct e-mail may be the “killer app” for marketing online. For now, responses are high and costs are low, and email is already everyone’s favorite “home page.”
Direct e-mail is where Internet Advertising was four years ago.
The database is the key. Those companies with the largest, most robust databases of opt-in e-mail accounts, transactional data, and intentional data should drive response rates and be most attractive to advertisers.
With privacy concerns a growing political issue, plus the ongoing “spam” backlash, direct e-mailers must be careful not to abuse their position in this market, one bad apple could spoil the whole lot. As William Park, CEO of Digital Impact, points out, many consumers have made an online purchase (and many more will in the future), but how many of these consumers have made that shopping site their homepage The answer is few to none. This is where e-mail comes in. E-mail proactively reaches users, rather than trying to catch their attention as they navigate the Web.
Figure 17 Reason For Use of the Internet
It is estimated that approximately 85% of home computer users and 75% of workplace computer users conduct personal and business operations via e-mail. As PC and Internet access continues to grow, e-mail will only become more ubiquitous, given its advantages over traditional “old world” media. Some of these advantages are:
• Cost: E-mail can substitute for standard mail, and even the telephone, at much more economical prices.
• Virtually real-time distribution: On the Internet, marketers get their message out immediately.
• Interactivity: E-mail allows for direct links to Web sites, so consumers can go directly from seeing an ad to conducting more research to actually purchasing the product, completing the sales cycle without interruption.
• Higher Click-Through Rates: While banners are currently generating click-throughs significantly below 1%, email is generating click-throughs in the range of 5-20%.
Table 12 E-mail Marketing Strategies
Continue with:
Part 13; Email , Part 14; Advertising or Direct Marketing , Part 15; What Does the 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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