Interactive Quarterly: Growing Up

The internet has matured, spurring more sophisticated and lucrative usage by advertisers and publishers.

Internet advertising is no longer the next big thing of 1996. Nor is it the questionable buy of 2001. As we head into the second quarter of 2004, it is a part of many companies’ multitiered marketing plans. And this year, forecasters are predicting, will be the biggest ever for Internet-advertising expenditures. In fact, leading online entities that include MSN, Yahoo!, and the heavily trafficked sites of publications such as The New York Times, The Wall Street Journal and Forbes all are reporting especially robust ad figures so far this year.

In early April, Yahoo! reported first-quarter profits of $101 million, compared with $46.7 million a year earlier, and projected year-end revenue of $2.4 billion, due to the strong growth of its ad business and the acquisition of Overture.

The New York Times Co.’s digital group, which encompasses and, reported that ad revenue in February soared 36.9 percent over last year. In 2003, revenue in the unit rose 23 percent from the year before to $88 million. In March, the site added a movie-theater section in response to the growing interest in online advertising among Hollywood studios; studio ads for the unit rose 94 percent in 2003 versus the previous year. enjoyed a 50 percent jump in ad business in the first quarter, while says 2004 ad revenue will best last year by 30 percent to 35 percent.

“We’re bullish,” says Gordon Hodge, media analyst with investment bank Thomas Weisel Partners in San Francisco, which projects that total Internet ad spending will jump 25 percent to $9 billion in 2004.

Much of that surge, Hodge says, can be attributed to the “torrid pace” of the growth of search, which has caught on with small businesses and Fortune 500 players alike. The bank estimates that business from search alone this year will grow 35 percent to 40 percent, to $3.5 billion, on top of last year’s remarkable 170 percent improvement. “Search is going after the $13 billion yellow-pages market, the $40 billion direct-mail market, so there’s a huge pie of opportunity for search to continue to [get a piece of],” says Hodge.

On top of search’s growth, old-fashioned branded advertising in the way of sponsorships, banners, pop-ups and rich media will see a more-muted but still strong 20 percent jump this year. Branded advertising on the Internet—already the segment’s biggest category—will grow as search continues to grow, Hodge says.

Hodge and others say several factors are driving the market. One is consumer behavior—the growing number of people on the Internet and consumers’ increased time spent with the medium. “The Fortune 500 began to take note,” says Hodge, especially in relation to mass media like network TV, which demands ever-higher CPMs even as its audience continues to migrate to cable. “As advertisers look around for other media with significant reach, that deliver the young demos, the Internet is the obvious place. We’re finding more and more users in the 18-49 demo, and that demo is spending six hours more per month [online] than it was a year ago.”

And unlike network TV, with Internet, the price remains competitive. “There’s so much supply out there, if you aggregate the inventory of Yahoo!, MSN, their sellouts are consistently below 50 percent of inventory, so there’s a lot of opportunity in improving sellouts,” says Hodge.

The evolving creative capabilities of online also have had an impact on business. American Express in March rolled out a four-minute “Webisode” featuring comedian Jerry Seinfeld, aimed at encouraging users to spend more time with its message.

Like Hodge, David Hallerman, senior analyst for advertising and marketing with New York-based Internet-research firm eMarketer, says paid search will lead growth this year, accounting for one-third of expenditures. Hallerman’s group projects total Internet ad spending will rise 15.3 percent to $8.3 billion this year, up from last year’s $7.2 billion. “With paid search, advertisers have seen its effectiveness as a direct-response tool,” he says. “The effectiveness is based on the fact that an individual is targeting himself at the point of search; he’s interested in the topic and at that moment.”

Hallerman says the best thing that ever happened to the online world was the burst of the dot-com bubble. “It began to take the Internet from something that was exceptional to something that was mainstream—the fact that the bubble burst and didn’t go away,” he says. The explosion of broadband connections is encouraging users to spend more time with the medium, he points out.

“Marketers finally woke up and realized consumers were online,” says Greg Stuart, president and CEO of the Interactive Advertising Bureau trade group. “Marketers have had enough time post-bust to figure out on their own that this thing works. Are you going to get a competitive advantage by spending more in TV? That would be idiotic.” In the fourth quarter of last year, interactive advertising brought the highest revenue, at $2.2 billion, of any quarter since 1996, when IAB and PricewaterhouseCoopers began tracking spending, reports IAB.

Jim Spanfeller, president and CEO of, says advertising is “coming back in a way that is dramatically and fundamentally different than 2000. These are not dot-coms—this is where blue-chip, offline advertisers are in some stage of experimenting, reaffirming, then shifting serious dollars to online spending.” enjoyed ad revenue last year that was 60 percent greater than 2002. Besides a greater number of companies growing to appreciate and understand the Web as a marketing tool, factors such as improvements in the economy, creative and trackability of online ad results are driving business, says Spanfeller. New advertisers this year include Charles Schwab and T. Rowe Price. is so sure of the results it can bring marketers that in a new trade campaign, it guarantees advertisers a refund if their ads prove to be not as effective as those on the WSJ’s site.

Randy Kilgore, vp of ad sales for, the largest paid news site on the Web, says his site’s double-digit ad gains are the result in part of tech-market leaders such as Hewlett-Packard and Microsoft stepping up their commitments. In early April, said it adopted behavioral-targeting technology from Revenue Science Inc. that uses natural- language keywords to create custom audience segments in real time and rank the quality of those audiences for Web ad campaigns. Singapore Airlines was the first customer to use the service. The technology has piqued the interest of the site’s consumer-electronics and automotive clients, as well as travel clients. Kilgore says ad categories picking up speed include retail, financial and travel.

“The consumer has been there for a number of years—what is surprising is that it’s taken this long [for certain advertisers to come around],” says Martin Nisenholtz, CEO of New York Times Digital, noting that this boom is much more “sober” than the last, built so much on dot-com hype. While he doesn’t want to downplay search, he adds, “I do think there’s a lot of hot air in the discussion, and a lot of it is legitimate—and some of it isn’t. You want to be careful before you blow something up into another bubble.” Nisenholtz says real estate and automotive continue to drive classified business at and Recruitment will grow this year, as the job market shows signs of improvement. On the display side, the sites continue to be “major-account-focused,” he says, with entertainment, travel, technology and education among the strong categories.

Joanne Bradford, chief media revenue officer for, says the site’s ad revenue in the first two quarters of 2004 is running some 50 percent ahead of the same period last year—notwithstanding search. MSN is enjoying “significant growth” in pharmaceutical and healthcare; the current “diet war” is paying “big dividends” for the site, she says. Other strong areas include automotive, with Detroit rolling out some 60 launches or revamped models this year. MSN played a “key part” in the launch of the Ford F-150 pickup truck, she says; the advertiser took over MSN’s home page but also utilized its search, automotive and entertainment features. Financial services also is coming on strong; American Express bought ads on MSN’s home page and its entertainment and women’s sites in April.

Bradford says that despite conventional wisdom that the country’s largest companies are driving the current steamroller of online ad spending, one cannot ignore the continued impact of the dot-coms. “When you look at travel and financial services, some of the biggest spenders are not in the Fortune 500 but are savvy marketers who are blazing a trail,” she says.

Still, the rate at which blue chips have come to embrace the Internet for their marketing campaigns is remarkable. Bradford notes that in late March, more than 500 major marketers, including Procter & Gamble, Toyota, Visa and AT&T Wireless, converged on MSN’s Redmond, Wash., headquarters for the fifth annual MSN Strategic Account Summit. “Two years ago, you couldn’t get those marketers to pay attention to this area,” says Bradford. “Two or three years ago, the market had lost credibility, and you could ignore it—but everybody knows digital marketing is key to success today, and you can’t ignore it.”

Tony Case is a contributing editor to Mediaweek.