Research points to growth of online ads

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A slew of new research further supports the thesis that online advertising is hot, hot, hot and here to stay.

Advertisers seem to think so: Collectively, they will spend $11.5 billion on online ads in 2003, a 41% compounded annual growth rate over last year's $2.1 billion, Jupiter Communications projects. The Internet Advertising Bureau, meanwhile, released data showing first-quarter Web spending doubled from a year ago--with more than half of revenues coming from deals where media companies were paid partly on how ads performed rather than on a strict cost-per-thousand basis.

Forrester Research reached similar conclusions on the rising interest in performance-based media compensation.

EQUAL TO CABLE BY 2003

Jupiter, in its report issued last week at the Jupiter Online Advertising Forum in New York, said online ad spending will top cable TV advertising and equal three-quarters of today's radio ad spending by 2003. Its prediction was based on an expanding online population, more time spent online, increased e-commerce and more online ad inventory sold.

Financial services, automotive and media companies will drive spending, with package-goods marketers contributing only about 7% to overall online ad spending, said Jupiter.

The Forrester survey of 33 traditional and 17 Web-based marketers found that those surveyed will increase the percentage of their ad budgets allocated to the Internet to 20% in 2003, from 8% this year. Traditional marketers will double their Web allocation to 10% of their budgets by 2003, while Web companies will decrease their Internet allocation to 26% from 35%, Forrester reported.

PERFORMANCE-BASED MODELS

Forrester projects advertisers increasingly will care less about CPM-based spending models and favor performance-based models. Pay-per-click, pay-per-lead or pay-per-customer deals will dominate half of online budgets in 2003, up from only 15% of budgets in 1999, the consultancy reported.

The IAB's latest research found that the first quarter of 1999 yielded $693 million in U.S. online ad revenue, up from $351 million for the first quarter of last year. That was the 13th consecutive record quarter since Price Waterhouse Coopers began tracking the market for the IAB in 1996. The growth rate fell to 97%, vs. the torrid 171% growth seen from 1997 to 1998.

The top 10 Web publishers garnered 75% of first-quarter revenue, vs. 64% a year ago.

Pete Petrusky, Price Waterhouse's director of new media, noted much of that gain came from acquisitions, such as America Online's purchase of Netscape Communications Corp.

43% FROM CPM COMPENSATION

Straight CPM compensation accounted for 43% of revenue, while CPM/performance hybrid arrangements generated 51% of business and straight performance deals drew 6%.

"There's a recognition of both buyer and seller to work on pricing schemes" that share the risk and reward of performance, Mr. Petrusky said.

Where they once stepped cautiously into online, marketers are embracing Internet advertising as an integral component of their media mix. But what of consumers?

The IAB traces the soaring ad revenue back, in part, to increases consumer confidence in the medium. But in a separate study, Jupiter found 64 percent of consumers still are unlikely to trust a Web site to keep personal and financial information private, even Web sites that prominently post privacy policies. Development of the medium depends on ad interest, but its proliferation depends on consumer comfort and acceptance, said Michele Slack, a Jupiter analyst.

"Consumers don't see privacy policies as good enough," Ms. Slack said. "Web sites need to get consumers to feel comfortable and [develop] trust" by educating consumers about the difference between security and privacy issues.

ADDRESSING PRIVACY A MUST

Randy Kilgore, advertising director at The Wall Street Journal Interactive Edition and dowjones.com, said the industry must move on privacy.

"[The issue of consumer acceptance] has to be addressed and addressed fairly quickly, but it is certainly addressable," he said. "We have a lot more safeguards in place to guard people's privacy. We have to address it; but we can, and it will be behind us before we know it. Advertisers are dong the right thing by demanding sites have a clearly posted privacy policy."

Intel Corp. last week became the latest major Web spender to say it will allow advertising only on sites with a prominently displayed privacy policy.

Contributing: Bradley Johnson.

Copyright August 1999, Crain Communications Inc.

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