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Measured Growth

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It's no secret that interactive advertising started its comeback in 2003. What may surprise some is that nine months into 2004, the segment is blowing past some of the predictions made by prognosticators last year. PricewaterhouseCoopers forecasted an online ad spending gain of 6.1 percent; now it's pegging 2004 growth at 14.6 percent. Veronis Suhler Stevenson predicted consumer Internet advertising would rise 6 percent for the year; now the merchant banker is adjusting its forecast to a 15.8 percent hike. (ZenithOptimedia Group is holding steady with its prediction of 8 percent growth by year's end.)

And the predictions for 2005? They're up, by as much as 10 percent, depending on the source.

It all paints a rosy picture of a medium that has put its infamous past behind it and finally been fully embraced by the marketing community. "The more I look at online advertising, the more I think it's the perfect medium for the new millennium," says Greg Stuart, CEO of the Internet Advertising Bureau. Medium-booster that Stuart may be, he has a point. At a time when advertisers are increasingly cranky about their traditional ad spend, a medium that promises—and increasingly delivers—on the holy grail of accountability should have a lot going for it.

Not everyone sees the market so positively. "Even though online advertising is up, it's up in only three of the categories," notes Leo Kivijarv, vp/head of research at PQ Media LLC, which helps Veronis with its data. (Those categories are keyword search, classifieds and rich media.) Banner advertising actually dropped between 2003 and 2002, accounting for 21 percent of the $7.3 billion total in 2003 and 29 percent of the $6 billion total in 2002.

Still, there is a considerable bright side. Measurement tools have improved, search technologies have become more sophisticated, targeting has grown more precise and broadband penetration is on the rise. Faster connections, in turn, allow advertisers to engage users in a way that the dial-up Internet never could. Many advertisers have done just that this year, including Burger King serving up its Subservient Chicken, Mitsubishi putting the final scene of its Super Bowl spot at seewhathappens.com and advertisers from Pepsi to Rayovac offering free music downloads. "The engagement factor is very big for advertisers these days," says Wenda Harris Millard, chief sales officer at Yahoo.

Indeed, broadband access, which is expected to be in 29 million U.S. households by the end of this year, according to PwC, is driving some of online's resurgence. "2004 has been the year that consumers really embraced video online," says Jeff Lanctot, vp/media at aQuantive's Avenue A/Razorfish. As banner ad spending declined, rich media filled the gap, growing from $300 million in 2002 to $584 million in 2003, according to PwC and the IAB. PwC expects broadband penetration to almost double to 54 million by 2008.

While connection speeds are improving, the industry has also continued its self-improvement efforts. For instance, several companies have refined such long-promised innovations as behavioral targeting, which serves ads to users based (anonymously) on surfing behavior, to enhance advertiser ROI. "I think we're where search was in 2000, 1999," says John Ferber, chief product officer at Advertising.com, a performance-based marketing specialist purchased by Time Warner's America Online unit in August.

Accountability is probably the sexiest topic in online advertising, and it's a conversation that starts with search. Barely a factor during the dot-com era, the category is now the primary driver of online's growth, accounting for 35 percent of 2003's online ad spending compared to 15 percent in 2002, according to PwC and the IAB. The most accurate stats so far this year are to be found in the S1 for Google's August IPO. The Mountain View, Calif.-based search king had $916.6 million in ad revenue last year and $1.3 billion in the first half of this year. "Everyone has some sort of search strategy and is starting to implement it," explains Tim Armstrong, vp/advertising sales at Google.

Of course, search can't go up forever. But on the other hand, its unparalleled ability to measure ROI brings an interesting dynamic to advertising's new era of accountability: the rise of what Armstrong refers to as "CFO Media"—media budgets directly calibrated to how much they earn back (or perhaps lose) for their companies.

Armstrong argues that the yearning for accountability is here to stay. "The principles that are in the marketplace today will be around for a long time."



Catharine P. Taylor is a contributing editor to Adweek Magazine.