I-world slims fast

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The internet ad industry, which grew fat on venture capital money last year, suddenly is facing a crash diet even more drastic than it originally envisioned.

Even a fleeting economic upturn can't be expected to revive the industry anytime soon. The shaky economy and the demise of dozens of dot-coms, coupled with problems such as conflicting measurement standards and the difficulty of proving return on investment, now are coming back to haunt Web sites. And the carnage is in earnings forecasts everywhere.

"I've heard some people describe it as `The Perfect Storm,"' said Christopher Todd, analyst at Jupiter Media Metrix, alluding to the recent film about a seafaring tragedy. "It's not a pretty time at all. A lot of things have gone unchecked."

In a month already filled with bad headlines, last week featured more of the same. Financial-services giant Merrill Lynch lowered an already downwardly-adjusted prediction for 2001 online ad spending to a total of $6 billion in 2001- a shocking 25% decline from the previous year. As recently as January, Merrill Lynch had predicted a flat year at $8 billion, but in light of earnings warnings from Internet stalwarts including bellwether Yahoo! in recent weeks, the company again revised its estimate. (During the summer of 2000, the firm had predicted $12 billion in online ad spending in 2001.)

Jupiter's recent report-"What's Wrong with Online Advertising?"-outlined some of the industry problems. The research firm found the lack of a leading measurement standard continues to create confusion, as publishers, advertisers and third-party ad servers all generate conflicting data. That leaves sites struggling to provide a return on investment for advertisers. "The value proposition for online advertising is still muddled," said Mr. Todd, giving the example that it's hard to compare the value of an e-mail ad campaign vs. an oversized ad on CNET Networks.

The Internet Advertising Bureau's move to sort out the mess was to propose new voluntary guidelines for expanded, oversized ad units last month, such as the vertical "skyscraper." The organization also completed negotiations last week with the American Association of Advertising Agencies to create standardized terms and conditions for buying online ads.

Yet while such programs may help lessen the chaos, their impact on Web publishers' bottom lines is unclear. A study released last week by the IAB and the 4A's found that only 43% of the 46 agencies polled said they thought the new banner formats warranted higher CPMs.

At a time when the fundamentals of the industry are being called into question, the reliance on CPMs, a metric borrowed from old media, is at center stage. "It's bad, and this is why," said Ted Meisel, president-CEO of paid search engine GoTo.com, pointing to a chart that calculates the cost of the average online customer lead as $5. "I'm skeptical the industry can deliver that value," Mr. Meisel said.

According to Myer Berlow, president of worldwide marketing at AOL Time Warner, America Online's rejection of the CPM model has made the company successful. Advertisers, are looking to use interactivity to spur their productivity online, he said, and the CPM model can't do that.

"I think the important thing is that it's not an Internet advertising market," Mr. Berlow said, "it's an interactive advertising market."

Indeed, companies such as AOL Time Warner appear to be uniquely qualified to weather the storm, not just because of their pricing models but also because of their clout.

According to Rishad Tobaccowala, president of Bcom3 Group's Starcom IP, Chicago, the only way marketers can create successful online campaigns is by integrating online as part of print, TV and other media plans. That's why offline alliances are critical for Web properties, he noted.

Merrill Lynch last week predicted that even as many Web properties are losing revenue, AOL Time Warner-by selling advertisers on the "unique asset" of America Online-is positioned to meet analysts' expectations this year.

Still, some say reviving the online advertising market will take more than new ad models and cross-media deals, considering advertisers' ignorance about the medium and the industry's poor job of educating and setting appropriate expectations.

Said Brian McAndrews, president-CEO of digital marketing firm Avenue A, "As an industry, I think we've talked about the power of digital marketing before we were ready to deliver on it."

Avenue A recently said it expects a revenue shortfall for the first quarter of 2001; instead of the $30 million to $33 million it had forecast, the shop now expects revenues to come in between $20 million and $25 million. Avenue A stock is 98% off its 52-week high.

The overall sense now is that for some advertisers, working the Web is optional. Though advertisers realize they need an online presence, they are feeling selective about it, said Steve Wadsworth, president, Walt Disney Internet Group. And because the medium is so new, it's being hit harder than traditional media in the current economic downturn. "It's just easier for major traditional advertisers to go with what they know," Mr. Wadsworth observed.

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