Internet/World Wide Web

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The Arpanet, predecessor of the Internet, was created in 1969 as a computer network for the sharing of information among four universities in California. Twenty years later, Tim Berners-Lee at CERN, the European Particle Physics Laboratory, developed the World Wide Web and introduced the first Web client and server the following year.

In 1991, a ban on business use of the Internet was lifted, and in 1994 the Internet's first banner ad—an AT&T Corp. ad from Modem Media—appeared on HotWired. (Proprietary services such as America Online and Prodigy were already running banner ads, but this was the first banner on the Web.)

HotWired was designed to be a professionally published site with original content and advertising; as such, the startup service sold 12 companies 12-week sponsorships; the cost per advertiser was $30,000. In addition to AT&T, sponsors included MCI Corp., Sprint Corp., Club Med, Coors Brewing Co.'s Zima and IBM Corp.

Dot-com fallout

In the late 1990s, the Internet underwent explosive growth, fueled by—and in turn fueling—an economic boom. The explosion was short-lived, however, and by mid-2000, the dot-com gold rush was in decline. Even as consumers continued to flock to the Internet at the end of 2001, many marketers remained on the sidelines following a disastrous period for most Internet-focused companies, which found themselves uncertain as to whether the medium would become a viable place to spend ad dollars. Steady growth in consumer penetration was not enough to convince advertisers.

After the crash of the Nasdaq stock index in April 2000, industry bellwethers such as AOL and Yahoo! continued to increase their audiences despite faltering stock prices. In March 2000, Yahoo! had a total audience of 145 million unique users who saw an average 625 million pages on the service daily. By June 2001, those numbers had increased to 200 million unique users with daily page views of 1.2 billion. In the same period, AOL's subscriber base grew from 22.2 million members to 30.1 million.

But marketers remained largely indifferent to the medium, blaming the ubiquitous banner, the same ad format widely credited for the Internet ad industry's early growth. In fact, the banner by this time was being identified as a significant contributor to the Internet's downfall. Companies—many of them dot-coms flush with venture capital money—invested heavily in the format during the boom, despite evidence that consumers were tiring of banner advertisers' often hard-sell come-ons. When the flow of investor capital dried up, people began to listen to naysayers; the result was a slowdown both in online advertising overall and a decline in the use of banner ads in particular.

Evidence of disenchantment with the banner had been apparent for some time. Data from a July 2000 Nielsen/NetRatings study showed that the average on-line user at the time was exposed to more than 400 banner ads each month but clicked on (i.e., requested further information) only 0.5% of them. During the dot-com boom, such low rates of follow-through hardly seemed to matter. From January to June 2000, Internet advertising increased 54%, from $818 million to $1.3 billion, according to AdZone Interactive.

But the Interactive Advertising Bureau, an industry trade group, found in a September 2001 study that ad spending for the first six months of the year declined by 7.8% compared with the same period during 2000. While that decline was only in the middle range among all media in an ad industry hit by an overall recession, the data showed a shift in online ad formats away from models such as banners.

The percentage of advertising banners on the Web declined dramatically, from 51% of the overall online ad market in 2000 to only 36% for the first six months of 2001. At the same time, classified advertising increased to 15% of total Internet spending, from 5% in the year earlier, while other formats-such as sponsorships, interstitials (full-screen ads that play between pages) and rich media (enhanced ads)-remained stable.

Boosting effectiveness

Early in 2001, the IAB came out in support of a variety of new ad formats designed to bring greater effectiveness to online advertising. The most popular of these, the so-called skyscraper, appeared on the computer screen as a long, vertical box. By April, the IAB was reporting that sites ranging from Microsoft Corp.'s MSN and Slate to Yahoo! and New York Times Digital's nytimes.com were accepting the "skyscraper" format. Studies released later in the year demonstrated that some of these new formats achieved a greater level of effectiveness than more established forms of Internet advertising.

Effectiveness itself remained an issue, however, and the absence of a system for measuring it served to restrict spending. The online ad industry had not yet devised universally agreed-upon definitions for such standards measures as hits and page views.

The outlook for the industry was not entirely bleak. The inexpensiveness of online advertising led some major brands to go online, especially those whose teen or young adult audiences are fluent in the medium. Anheuser-Busch Cos.' Budweiser found a way during 2000 to translate its popular "Whassup?" campaign to the Web, which included a site from which consumers could download the campaign catchphrase in 36 languages. The brand also experimented with online "daypart buys," a relatively new concept, placing ads for Bud on the home page of the CBS MarketWatch site on Friday afternoons.

An October 2001 survey by the Association of National Advertisers showed that 79% of respondents had advertised online in 2000, an increase of nearly two-thirds compared with the previous year, and that they spent on average $2.4 million each, up 24%. A total of 92% used banners. However, only 42% said that they planned to increase Internet ad spending in 2001.

Rebounding

Internet advertising came roaring back in 2003 as both the economy and ad market rebounded following the 2001 recession. Internet ad spending in 2003 leaped 21% to $7.3 billion, according to the Internet Advertising Bureau (IAB), a trade group. That revenue growth, though, also reflected a dramatic shift in where advertisers put their Internet money.

In 2002, banner advertising—the original form of Internet ads—was the biggest form of Web advertising, generating 29% of Internet ad revenue, according to the IAB. That was followed by sponsorship (18%), classifieds (15%) and buys of key words on Internet search engines (15%). In 2003, key word searches leaped to the top, accounting for 35% of Internet ad revenue, followed by banner ads (21%).

This shift largely reflected the rise of Google, which in a few years time had emerged as the top search engine. Google in April 2004 filed for an initial public offering of stock in one of the most-anticipated IPOs in years. Google had one point of difference from the IPOs of early dot-coms: It was highly profitable when it went public.

Nielsen/NetRatings, a researcher controlled by VNU, in March 2004 reported that 74.9% of Americans—more than 200 million Americans—had Internet access at home. NetRatings’ report on top Web sites in early 2004 showed where the traffic went. Microsoft Corp.’s MSN and Microsoft were the top two Web brands for traffic, NetRatings said, with Yahoo!, Time Warner’s AOL and Google rounding out the top five. Significantly, two Internet storefronts—eBay and Amazon.com—made the top 10, showing the importance of shopping sites as destinations for Web users.

Web traffic also was speeding up with broadband in the first years of the new century. By November 2003, NetRatings said, 38% of U.S. home Internet users were accessing the Web with a high-speed broadband connection, notably a cable line or telephone DSL line. Broadband offered both a faster connection and always-on access, meaning users had a "dial tone" to the Internet whenever they opened their Web browser.

Dial-up Internet users in November 2003 still outnumbered broadband users, but broadband was closing in fast. The rapid fall of dial-up service was bad news for dial-up leader AOL, whose customer count began to fall early in the new century as "newbies" who started with AOL graduated to broadband services run by other companies. As of March 2004, AOL’s U.S. subscriber count was 24 million—and falling.

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