The Internet wasn't supposed to turn out like this, was it? Once a cacophonous mix of quirky start-ups, these days the Internet feels so corporate, with Google, Yahoo!, MSN and AOL being the broadcast networks of their day. The only tie, in some cases, to their up-by-the-bootstraps beginnings are their whimsical names.
Seen through the lens of ad revenue, the world domination of a handful of online brands appears more pronounced. And getting more so. In 2003, online ad revenue for Time Warner's AOL, Yahoo! and Google combined was $5.1 billion; by year-end 2005, that figure stood at $11.9 billion, more than doubling. That outpaces even the industry's breakneck domestic growth of 71 percent over the same period, according to statistics compiled by the Interactive Advertising Bureau and PricewaterhouseCoopers.
Google alone saw its ad revenue almost double, from $3.1 billion to $6 billion, and the roster of other companies that can claim $1 billion in annual online ad revenue is a small one indeed, consisting of some very familiar names: Yahoo!, Time Warner's AOL and Microsoft's MSN. To get a sense for how disproportionate the market is, CNET, a major but second-tier player, generated $284 million in ad revenue for 2005.
Recent headlines don't do much to douse the theory that the big are getting bigger, and the rich, richer. Take your pick: There's Google's December 2005 purchase of 5 percent of AOL. Or eBay's announcement in May that it would partner domestically with Yahoo! for advertising services. Or this quartet of August blockbuster announcements: AOL's decision to stop pursuing subscription revenue in favor of focusing on ad revenue; eBay's partnering with Google for text advertising internationally, social-networking site Facebook's alliance with Microsoft's adCenter and the biggest headline-maker of them all: Google's selection by Fox Interactive Media and its crown jewel, MySpace, to provide search services.
It's enough to make one wonder whether there will only be room at the Internet banquet for the biggest players. "I do worry that all of these incredible mavericks will get folded in [to the larger Internet properties]," says Adam Guild, president/CEO of Interep's Winstar Interactive Media, which reps name-brand, if smaller, sites, such as zagat.com and fodors.com.
But look a little deeper. There are plenty of signs that the online ad community is already spreading the wealth. As this year's Web Site Hot List (pages 28–29) demonstrates, the Web continues to be flooded with new, hot properties and ad models, and together, they will conspire to balance out where the Internet audience travels and therefore, where the ad revenue goes.
Follow the Eyeballs
Where audience goes, advertisers usually follow. "Look at where MySpace was a couple of years ago. [It] didn't exist," observes John Gray, director of interactive marketing at Ann Arbor, Mich.-based interactive shop Enlighten.
In fact, while the Google/MySpace deal is another example of the rich—in this case Google—getting richer, it doesn't include MySpace's brand advertising revenue stream, which is relatively untapped compared to other sites with huge audiences. As of July, MySpace had 46 million unique visitors, according to Nielsen//NetRatings.
Though more and more prominent marketers do use the site for branding, they are still wrestling with how best to incorporate themselves into community-based sites, where intrusiveness is frowned upon and the content can sometimes be questionable.
Michael Barrett, who joined Fox Interactive Media as chief revenue officer in May from AOL, acknowledges some advertiser concern, but cautions, "To say it's a huge issue is an overstatement." What his ultimate boss, News Corp. CEO Rupert Murdoch, has to say about MySpace's potential is more important. In July, before the Google announcement, he boldly predicted that the company's Internet properties for fiscal 2007 would have almost $500 million in revenue.
As impressive as the potential raw revenue numbers are, what's also interesting about MySpace is that because it's a community-based site, it's in the forefront of developing new online ad models; the site helps advertisers build online profiles with varying degrees of functionality, and then helps "activate" the profile by finding ways for it to reach the kinds of friends the advertiser is looking for. If an advertiser, for instance, wants to reach women 18–24, MySpace can "introduce" the profile to the target as a potential new friend.
Ultimately, in keeping with the site's social networking ethos, the success of the advertiser profiles rise and fall based on how popular they are within the MySpace community. It has become increasingly popular for advertising icons such as Burger King's King to set up member profiles. One of the lures on the King's profile, for instance, is "Gifts from the King," including free downloads of the Fox series 24.
Other new breakout brands, such as the video-sharing site YouTube, demonstrate how quickly a site can go from zero to 60—and beyond. Launched only last December, YouTube had 4.9 million unique visitors in January, its first full month of operation. That number leaped to 30.5 million as of July, a 50 percent increase from the month before. Despite aggressive moves by all of the major portals to develop competing properties, none have anywhere near YouTube's audience. Google Video had 9.3 million uniques in July; MSN Video, which had almost twice as many visitors as YouTube in January, had just 9.2 million in July.
Like MySpace, YouTube is just getting started when it comes to pulling in its rightful share of ad revenue; only last month did it start to woo advertisers with something other than run-of-the-mill banners. With an emphasis on entertainment properties, it's trying to develop whole new advertising models, unveiling two new concepts: the so-called "brand channel" and the "participatory-video ad," both of which are meant to assimilate ad messages organically into the YouTube community.
The participatory-video ad is a paid advertising placement on YouTube, which, just like videos that are submitted by users, can be shared or embedded in blogs. Brand channels are paid areas on the YouTube site; the content is devoted to the advertisers. Just as with the nonpaid content, visitors can subscribe to the channel to receive new content as it's posted, and the channel's popularity is charted by metrics such as how many people have viewed it and subscribe to its feed. One of the first brand channels on the San Mateo, Calif.-based company's site was devoted to a brand of sorts—Paris Hilton—-and its launch was timed with the August release of her CD. It contained a link to a site devoted to her album, videos of Hilton and opportunities for visitors to comment about her. YouTube hopes to attract a large range of advertising categories to the concept.
Answering critics who say questionable content will keep many advertisers away, Tony Nethercutt, who joined YouTube earlier this year from Yahoo! as vp of sales, says right now his "biggest issue is just having a handful of sales people" to keep up with advertiser interest in the site.
Adds Christine MacKenzie, executive director, multibrand marketing and agency relations at Chrysler Group, "It's not so much 'Do you want to advertise on those sites?' It's more learning how to advertise on those sites." The concern, she says, is how to place marketing within the context of the site without being intrusive.
Patrick Keane, head of ad sales strategy for Google, says that the right ads placed on the right sites can bring value to both publishers and users. Google's AdSense program, which syndicates Google search advertising out to thousands of third-party Web sites of all shapes and sizes, does just that. When the program launched three and a half years ago, says Keane, "Many would have argued that most of the content on the Web couldn't be monetized."
In fact, Google is one of the best arguments that, even now, online ad revenue is a bit more evenly distributed than it appears on the surface. Though it's often overlooked, a healthy portion of the revenue Google reports doesn't end up in its coffers. The company recorded almost $2.5 billion in revenue for the second quarter of this year, but $785 million of that was paid out to AdSense publishers, which is recorded by Google under traffic acquisition costs. That money is redistributed all over the Web, from major players such as CNET, to tiny blogs. That dynamic is true of most other major players as well, such as AOL and Yahoo! "It's an urban myth that the industry consolidates, knocking out all the small guys," says Greg Stuart, outgoing CEO of the Interactive Advertising Bureau.
Just as television media buyers have put more money into cable television, so, too are interactive media executives finding smaller, more targeted sites in which to put their money. As buyers grow more sophisticated, so, too do the media plans. For these buyers, it doesn't come down to filling the plan with, "I-won't-get-fired-for-buying-you sites," says Winstar's Guild, but what is most efficient and effective.
And also what's most cutting edge. Brands like Verizon, which aim much of their advertising at 18 to 34-year-olds, feel compelled to put their ads in new places. These days, that tends to be social networks. "We definitely dabbled in that space," says Sahu Habibi, senior manager of online marketing at the telecommunications giant. He says Verizon tried it because "a lot of the landscape is so new that you want to find out what the appropriate space is" to reach your target.
This has been particularly important for the company as it works on "changing the perception of Verizon from [being] a telephone company to broadband company," says Habibi. To support the launch of its Verizon Beatbox Mixer, an application that combines the ability to remix video and audio with gaming, the company in July developed a community on MySpace around Beatbox.
Playing with the Big Boys
MySpace long ago stopped qualifying as an obscure little Web site. Still, its rise shows the Web's tendency to spawn new brands that can eclipse old ones within a few years, or even months. "Today's MySpace could be yesterday's GeoCities," says Dave Morgan, chairman, founder of online ad-network Tacoda. Adds Dean Harris, CMO of travel-search site Kayak.com and former CMO of top Internet-ad spender Vonage, "It's hard to imagine the big guys have a lock on all the interesting available content."
Another sign that smaller ad players are starting to play with the big boys is the rise of the online ad networks. Once viewed as peddling inventory on "those tiny little sites that nobody's ever heard of," says Enlighten's Gray, they now offer an alternative—even in terms of reach—to the portals. Tacoda, for instance, the New York-based company that specializes in behavioral targeting, reps some 3,800 sites that together reach about 130 million unique visitors per month. By comparison, AOL's portfolio of sites, including such properties as Mapquest, reached 100 million unique visitors per month.
Thus, the online ad networks are now much more of a legitimate alternative to the portals. Enlighten's Gray says he knows of "automotive advertisers [who] have been actively seeking ways to replace portal buys because rates have increased so dramatically in the past few years." Chrysler's MacKenzie won't say which ad networks the company uses, but employed them, along with some portal buys, for the recent online launch of its "Ask Dr. Z" effort in July. To Chrysler, there's little difference in how effective those buys can be when compared against the portals. The network buy resulted in good click-through rates at a low CPM. "A site is successful in our mind if it delivers against our objectives," she says.
In part, the ad networks can offer comparable metrics to the portals by acting like them, bringing simplicity and scale to what otherwise would be the labor-intensive process of buying smaller sites. "If I'm an overworked planner and can run a campaign on four big sites versus 14 smaller ones, which would I choose?" asks Greg Smith, COO for North America of WPPGroup's Neo@Ogilvy.
Tacoda's Morgan says that part of his company's success is its ability—through behavioral targeting—to find valuable inventory that contextual targeting might overlook. He points to a campaign that ran on Tacoda's networks starting late last year for Panasonic plasma screen TVs. The effort was aimed at people across Tacoda's network who had visited comparison-shopping sites to research the category. Tacoda served ads when users were viewing other content, assuming there would be less of a chance Panasonic's message would compete with rival brands.
Morgan says the effort proved that "talking to the right people out of context can deliver a more effective result." More than 28 percent of those targeted through behavioral advertising showed an intent to purchase Panasonic; 17 percent of those who received ads around related content showed similar intent.
Portals in a Storm
Of course, even in a market where a rising tide lifts all boats, luxury yachts like the portals still have to deftly steer their businesses. One can rest assured that execs at the biggest players aren't sitting back and sipping a gin and tonic while others innovate.
In fact, Yahoo! is concentrating most concertedly on behavioral targeting, much along the lines of what Tacoda is doing. Yahoo's executive vp of global ad sales, Greg Coleman, talks excitedly about what he calls "Behavioral 2.0," which takes into account where users are traveling online and what they are clicking on.
And the portals' efforts at solidifying their dominance in the online ad marketplace hardly end there. Trying to capitalize on the explosion in online video, AOL launched AOL Video, perhaps the most aggressive video strategy on the Internet thus far, since it serves as an aggregator of virtually all online video content from its own archives as well as video from newcomers such as YouTube. MSN and Yahoo! are both hard at work trying to build a better paid search mousetrap than Google. Says Eric Hadley, general manager of global marketing, MSN: "Google is the easy answer [for advertisers]. It isn't always the best, most effective answer." And Google, of course, keeps churning out new, entirely ad-supported products such as Gmail.
But for all the talk of behavioral targeting, social networking and better search tools, there is one simple concept that ultimately provides balance to the marketplace.
"It's a very market-driven, supply-and-demand pricing environment right now," says Mike Kelly, president of AOL Media Networks. He predicts that as the portal inventory gets tight and pricier, it will send money to vertical sites, specializing in content areas such as sports or health. It also leaves an opening for ad networks and popular new Web properties to provide viable alternatives to the current consolidated market.
It's a tantalizing scenario. That is, if you're a not-yet-dominant Web brand, just like Google and Yahoo were, all those Internet years ago.
Catharine P. Taylor is a contributing editor to Adweek Magazines.