The Internet advertising market is gradually growing up. And it is being reflected in companies' marketing strategies in the run-up to the crucial Christmas spending spree.
With the slowdown in the Internet economy, online advertisers have become more considered in their approach, and both clients and buyers are thinking carefully about where the money should go.
"It is not like the smash-and-grab of last year," says Fru Hazlitt, European marketing director for Yahoo, referring to the frenetic pace of the business when many consumer-focused dotcoms tried to buy themselves a share of the market.
There is also a new realism about the levels of income that sites can generate through advertising. A Merrill Lynch report last month from famed US Net stock analyst Henry Blodgett said that things could get ugly fast, and that "the deceleration [of online advertising from the third quarter 2000 to the second quarter 2001] is likely to be as dramatic as the acceleration was a year ago."
In July, Yahoo's share price tumbled, despite a 110 per cent increase in revenues for the second quarter from £85.4 million in 1999 to more than £179 million in 2000. Investors were scared off by fears that the online advertising market, which accounted for a large chunk of Yahoo's revenue, was slowing and that its exposure to advertising income from flaky dotcom firms was too high. A few days later, shares in the advertising sales and delivery network Doubleclick fell 30 per cent after the company reported disappointing third quarter results.
Scared by the trend across the water, many European Web site publishers are now cutting down on the amount of space they make available to advertisers, while still maintaining rate-card levels. And everyone is still trying to think of ways to get beyond the ubiquitous banner advertising – the rectangular ads at the top of most Web pages.
"There is now a much greater emphasis on return on investment and post-click activity," says M-digital's Martin Shaw, a media buyer. "Optimisation has definitely been a trend this year. Advertising campaigns have started broadly and narrowed down to only those sites that produce results."
Not long ago, the byword for banner advertising was reach. The top Web site destinations tended to garner the bulk of online ads because they offered the widest and largest audience. But as the medium has matured, Web surfers have become immune to the ads, much like TV viewers who glaze over during the commercial break. Click-through rates – the response when an ad is clicked – have fallen across the board for many campaigns. It's getting harder and harder to get that click, and advertisers are becoming more careful about how they target their cash.
The focus on results means that there is much less space available for advertising on the most popular sites. According to Alan McCulloch, MD of media buyers i-level, search engine Excite was typical when it warned buyers two months ago that they had to get in early for Christmas, and ad rates would be non-negotiable. Excite confirmed that space has been at a premium on its most popular channels.
McCulloch says 80 per cent of the buying revenue tends to go to the top 20 most popular Web site publishers, and that this is forcing advertisers to consider more innovative ways to get their message across. One method is the humble email, though the sheer volume now circulating means that winning a share in the market is not easy.
"Email marketing has become much more popular," says McCulloch. "But it has its limitations – there are only so many newsletters and emails people are willing to read."
Earning commission by hosting ads through affiliate programmes and sponsorship deals is also increasingly popular. Jupiter Communications predicts that, by 2002, 54 per cent of retail sales on the Net will come this way.
But the harsh reality is that online advertising remains a small part of the biggest advertisers' budgets. According to October's Bellwether report, produced quarterly for the UK's Institute of Practitioners in Advertising (IPA), Internet marketing and sponsorship grew to 2.5 per cent of marketing budgets for the third quarter of this year, from 1.5 per cent in the second quarter. By contrast, in 1999, commercial radio accounted for 5.5 per cent of all marketing expenditure. Only 2.5 per cent of all advertising budgets are being spent online. Offline advertising – TV, radio, press – remains the mainstay for most companies, including many of the dotcoms.
"Sites have not seen money from big offline brands like Unilever and Procter & Gamble because they are still working out what digital media can do for them. We won't see the big brands online until they can see what online advertising does for brand effect," says McCulloch.
The arrival online of large traditional firms – the "bricks and mortar" companies – has also driven up activity in marketing. According to recent statistics from Media Metrix, high street retailers such as Argos and WH Smith each attracted over 200,000 individual visitors to their sites in September. This is the first time such retailers have appeared in its top 10 list of most-visited retailing Web sites, and it raises the spectre of chain stores creating their own sites to which they can drive their considerable customer base. Perhaps the biggest firm to experiment with its own route to online buyers is Procter & Gamble, which famously set up its own site, Reflect.com, to market its cosmetics.
While traditional companies are going online, many dotcoms are flooding into traditional media. Steve Chippington, marketing director for Shopsmart, explained that the company's budget this Christmas has been split 70-30 between offline and online, because Shopsmart's sponsorship of Channel 5 has worked so well. It is now the third most visited retail Web site in the UK with 370,000 individual visitors in September alone, according to Media Metrix.
Russ Ackerman, director of global branding and marketing for book and CD retailer BOL, agrees that most basic brand building takes place offline and that the best campaigns are integrated. He estimates that BOL's advertising spend has increased between 25 and 50 per cent this year, with a 60-40 split between offline and online.
All eyes are now on how sites and their advertisers navigate the crucial Christmas period. Shaw estimates that media-buying expenditure in the UK has almost doubled to £100 million (168 million euros) this year, with 40 per cent of overall budgets being spent in the last quarter up to Christmas.
Ackerman says the seasonal pressure spells trouble for the smaller companies. "Those who can achieve the sales in this period will be the winners."
Copyright 2000 The Industry Standard Europe, International Data Group Inc. All rights reserved.