Analysis: 2001 will be no banner year for online ads

Analysis: 2001 will be no banner year for online ads

When Michele Bilodeau's clients started advertising on the Internet, folks would ask, "I've got (US)$500, so what can you do for me?" she said, expressing mild disgust. The Boston-based online ad consultant has watched mom-and-pop businesses grow more savvy about what can and cannot be done with a banner ad on a Web site.

Apparently, so has everyone else. Industry experts say advertisers will pull back this year and re-evaluate their online strategies, integrating the Net more intelligently into total ad campaigns. But until companies figure out how to do that, stock values of those dependent on online ad revenue will languish. Investors are likely to continue to punish Internet companies, and that includes some major names like Yahoo Inc. and DoubleClick Inc., both of which will release financial reports this week.

Gone are the days of when online advertisers paid big bucks to appear prominently on popular search engines sites next to, say, expensive Superbowl ad spots.

"I think today is very different than this same time last year," said Sam Gerace, chief technology officer of Internet advertising company Be Free Inc. "I'm seeing coherent strategy now, not an inability to understand what to expect from online advertisement."

When the markets love Internet companies, everything just seems to work right. Investors pump money into dot-coms, those sites advertise on other sites, and the advertising boosts everyone's revenue. It's love requited, and more investors pile on. Positive feedback is a wonderful thing.

"Some of the dot-coms had no time," said Gerace. They produced ads in quantity, ignoring bad graphics, market segmenting and assessment, he said. "It's now very evident to me that people are taking time to analyze what's relevant and what's not. We're now seeing marketers tweaking them in real-time."

Negative feedback can damage ad revenue as quickly as positive feedback helps it. Investors pulled money out of dot-com companies as the market melted down last year, the companies in turn pulled their money out of online advertising budgets, and sites dependent on advertising revenue sucked value out of Internet stock portfolios. The investor stampede out of Internet stocks became justified.

It's a vicious circle, and the most powerful, highest-soaring Internet companies are caught in the spiral.

Merrill Lynch & Co. Inc.'s Internet analyst Henry Blodgett predicts no growth for online ad revenue this year, pegging it at $8 billion, level with last year. Internet advertising revenues for the third quarter of 2000 amounted to $1.99 billion, up 63.3 percent from one year earlier but down 6.5 percent from the second quarter of 2000, according to analysis from PriceWaterhouseCooper Inc.

The scheduled earnings announcement from Internet portal Yahoo on Wednesday and online advertiser Doubleclick on Thursday may signal the market's near-term direction to investors. Analysts guess Yahoo depends on advertising revenue for between 80 percent and 90 percent of its revenue. Yahoo on Tuesday tried to shift the spotlight away from finances to its enterprise portal software business and new wireless access capabilities, hoping to draw attention to potential revenue areas beyond ads.

"It's unsurprising that Yahoo would point to aggressive successes in their [software] business," said Whit Andrews, an analyst for technology market research firm Gartner Group Inc. "This gives them a chance to remind Wall Street that they have businesses beyond advertising cheap long-distance plans."

Andrews said he believes the advertising slowdown -- reflective of a slowing economy and a growing financial conservatism -- will result in a more thoughtful, more cost benefit-oriented approach to placing ads. While a site like Yahoo may rank number one on PC Data Online Inc.'s monthly chart of most popular sites, popularity isn't everything.

"Reach is only relevant if it can be subdivided and intelligently targeted," he said. "Success comes down to placing the right ad in the right place at the right time, not because Yahoo gets 70 percent of the audience."

Online advertising dollars may not grow this year, but the money may end up being more effectively spent by companies of all sizes. Boston's Bilodeau said banners can compare unfavorably to online newsletters and opt-in e-mail.

"It's hard to sell people on the banner because the opt-in e-mail list is so useful ... especially if they have a limited budget," she said. "Banners can be expensive, because you have to buy so many impressions." She said she hopes her clients pay attention to what percentage of actual sales come from banner ad click-throughs, rather than just the number of site visitors.

While carefully emphasizing the voluntary, opt-in element of e-mail ad campaigns to avoid the impression of promoting unsolicited commercial e-mail, Bilodeau said her clients tend to have a better chance of reaching the customer base they want using newsletter subscriptions. "It's targeted, not mass-marketed."

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