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Do e-Ads Have a Future?

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DQI Bureau
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Each company eats up every nanosecond of its allotted 45 minutes, hoping to

convince the skeptical audience that their technology can provide the

much-needed spark to reignite Internet advertising.

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For

the Web portal, this is a critical meeting. With online ads declining in

effectiveness, dropping in value, and failing to live up to their

much-ballyhooed potential, Excite@Home is under intense pressure to come up with

new, innovative ways of advertising. Nearly half of the company’s forecast

$653 million in 2000 revenues is expected to come from online advertising. But

as an overhead screen displays a whizzy pop-up box that lets Net surfers view

360-degree images of an advertiser’s product, including zoom and spin

controls, it becomes clear from the gloomy faces around the table that there isn’t

much excitement in the room today. Even the usual kinetic energy of Susan

Bratton, Excite@Home’s 6-foot senior vice-president for sales and marketing,

is subdued. "I didn’t see anything that really pushed the envelope,’’

she says. "The success of Net advertising is critical.’’

The clock is ticking for online advertising and the Web companies dependent

on the dollars they bring. Money that flowed furiously into Net advertising from

dot-coms has dried up faster than a 30-second Old Media ad. And traditional

advertisers, still uncertain about how to value online marketing, aren’t

piling in fast enough to take up the slack. One reason for their hesitancy: The

so-called "click-through rate,’’ which measures how many people click

on ads for more information, has fallen dramatically. Click-through rates on

banner ads–billboard-like pitches that account for 50% of Net advertising

revenue–have plummeted from 30% for the first banner ad in 1994 to a measly

0.3% today. That’s well below the 1% to 1.4% response rate of direct mail.

For all the effort, not enough companies are making it over. After rising

nearly 100% annually since 1997, the growth of online ad sales is expected to

nosedive to 17% in 2001–less than half what Merrill Lynch & Co. was

predicting just four months ago. That means overall U.S. online ad revenue will

hit only $9.7 billion this year, or 3.5% of total ad dollars. That’s a paltry

increase of three-tenths of a percentage point over last year and far short of

what experts had predicted in the past.

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Clawing for survival. It gets worse. Take out the 75% of online ad dollars

that Yahoo, America Online, Excite@Home, and six other major portals capture,

and that leaves thousands of Net companies fighting for what’s left. As unsold

ad space piled up, prices in the fourth quarter declined 10% to 15% for every

type of ad. At the same time, e-mail marketing prices dropped 25%, to $150 per

thousand messages delivered. At those rates, many Net publishers may soon find

themselves clawing for survival. Already, entertainment site Pseudo.com and free

Internet service provider 1stUp.com Corp., which both relied on advertising

revenue, have shut down. Lehman Brothers estimates that it takes $200 million to

$250 million in annual revenues for online publishers to break even–too big a

nut for most. Apart from AOL, Yahoo, other major portals, and CNET, the Wall

Street firm figures only 14 online publishers out of some 10,000 today will

survive in their present form.

Already there are signs of more fallout. On Dec. 26, EarthWeb Inc. sold its

ad-supported Web sites and e-mail newsletters, choosing to become a recruiting

service for tech workers. The number of companies that have missed quarterly

estimates, slashed staff, or been downgraded by Wall Street is piling up–including

the likes of Yahoo, DoubleClick, NBCi, iVillage, RealNetworks, CMGI, and Ask

Jeeves.

By Heather Green and Ben Elgin in BusinessWeek. Copyright 2001 by The McGraw-Hill Companies, Inc

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