As the online advertising market shot up from $0 in 1995 to $6B in 1999–with projections of hitting $16B by 2005–there was a surge of companies building websites that could “monetizing eyeballs”. With the advertising slump that accompanied the dot com crash, in conjunction with the economic recession and post-9/11 economic stagnation, a lot of companies moved away from the online advertising model to premium and subscription based revenue streams.
Today, with an online advertising market of about $12B and Google’s 2005 revenues hitting $6.1B–based on 99% ad revenue–the desire to revisit the original premise of an online advertising driven business has increased.
The Economist recently published a report on the online advertising business entitled “The ultimate marketing machine” in which it details a number of new trends that are making online advertising not only a desirable outlet for promotion but also a competitor to traditional advertising channels.
Online advertising is no fad. It has evolved out of thousands of years of commercial promotion ranging from signs written on to papyrus in ancient Egypt to the $300M mega-campaigns of today.
A look at the evolution will show where we’ve been and where we’re going.
In the 1950‘s with television viewership booming there was a rise in brand advertising. The theory was that the best way to sell your company’s sugar cereal was to tie it to a brand that was larger than the product itself. This style of advertising is typically referred to as “Interruption Marketing” because it would interrupt what someone was focused on to present them with the promotion. This was easy to do with television, particularly when there were very few channels to choose from.
Of course, The “Tony the Tiger” style brand building of the 1950‘s didn’t scale. The number of brands and the number of channels through which people are exposed to brands increased to the point where people were too bombarded with advertising to even notice. The expenditures continue, however.
In response the 1960‘s brought forth a more subtle form of advertising, where the content and the promotion was blurred. It marked a fundamental shift in print media, with the perennial example being Cosmopolitan Magazine. Cosmopolitan was started in the 1880‘s and grew rapidly as a publication of fiction stories, printing the works of talented authors such as Jack London and H. G. Wells. With the advent of television the demand for fiction magazines was decreasing and the subscription rates were falling. Helen Gurley Brown, a former advertising copywriter, approached Hearst about transforming the magazine to focus on women’s advice, which allowed them to more easily blur the line between paid placements and their content. The influence is undeniable. Cosmo readers today account for £1 out of every £11 spent on cosmetics and skincare in the UK.
An extension of this trend came with the rise Permission Marketing. Cable Television jumped on this trend with stations like MTV that were entirely devoted to promotional content that people would opt to watch. Of course the next wave would be the most interesting, as the Internet allowed for unprecedented interactivity and contextual marketing.
Interactive & Contextual Marketing
The cost per 1000 viewers (CPM) of a Super Bowl ad, the quintessential place for brand advertising, is roughly $25, and there is no shortage of companies lined up to pay. TV averages around $10. This is not that different from newspaper CPM rates which can be anywhere from $5 up to $65.
Of course with this style of interruption advertising you have no real idea how effective a particular spot was. There is no direct customer feedback in the form of an action to the ad.
Overture, an online advertising company that Yahoo! purchased in $2003 for $1.7B, patented the notion of an auction system for advertising that is paid for based on user action (a click of a mouse) rather than simply an impression.
Google, which has come to popularize the notion of Pay Per Click and Contextual Advertising, agreed to issue 2.7 million shares of common stock to Yahoo! in exchange for a perpetual license of US Patent 6,269,361.
Although the costs can vary wildly because of the auction-based pricing system, a click will typically cost a company around 50 cents or $500 per 1000, which is around 25x going rate of CPM. This premium reflects the additional value that advertisers feel they receive from placements that are interactive and require user participation, rather than just passive placements.
Of course CPC advertising is not without its problems. Just because someone clicks on an ad doesn’t mean they’re necessarily interested in your product. They may simple by clicking on ads on their own site to raise revenue, or clicking on a competitor’s ad to force them to waste advertising dollars. Both of these are types of click fraud that are rampant today, with ads for “Clicks for Rupees” tantalizing those in India to destroy the benefits of CPC advertising.
Google and other companies are moving beyond pay per click and initiating CPA, or Pay per sale, advertising models in which the company is only paid if they lead to a sale. The premiums here are far more significant, with potential affiliate rates of $10, $20 and up per sale, which is around 30x CPC and 750x CPM.
Diverse Opportunities for Promotion
The online advertising world has changed a lot since 1999, and it has also had a significant impact on traditional Madison Avenue advertising philosophy. New models haven’t destroyed old ones, but have impacted the premiums that they can charge and offered more choice to advertisers. The more time people spend online, in an interactive environment, the more the opportunities there are for promotions that are well metricized and understood. As the Economist noted:
“If you can track the success of advertising, especially if you can follow sales leads, then marketing ceases to be just a cost-centre, with an arbitrary budget allocated to it. Instead, advertising becomes a variable cost of production that measurably results in making more profit.”
Also I think new media/channels of advertising like videos and podcasts are here to stay too. They offer something different from traditional advertising. That’s visual and interactivity.
Posted by Paul at September 5, 2006 2:56 PM
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