Thank you, Saukriver, for bringing David Streitfield's Washington Post article, "Advertising on the Internet Doesn't Click" to my attention. I loved the title because the psychologist in me enjoys double entendre. The title is both accurate and, perhaps, misleading, given the two implied meanings, its denotation and slang connotation.
Beginning with the denotation, it appears that click rates are declining. In 1997, the click-through rate was estimated to be 1%, in '98, about 0.5%, and last spring after the meltdown, it was down another half, and the guesstimate is now 0.1%. And, it may only a "handful of people out of every 10,000" if only you "eliminate sweepstakes and similar ads." Gilder must be right about the growing scarcity in human time and attention.
The slang connotation of "click" here implied that Internet advertising doesn't click in the sense of working, that it is "hitting its first speed bump." This is true also if you ignore the two "if only's." The, first one is above and set in italics so you would notice it. It implies incorrectly that there is nothing significant to be learned from what strategies are working in banner ads. The second "if only" followed the speed bump in the form of a paragraph beginning with "But." And, this paragraph, which is immediately below, makes it clear that advertisers either believe that certain forms of advertising are working, or that they intend to throw good money after bad.
Streitfield wrote, "But while experts may debate whether certain ad strategies are effective, few doubt that the Internet advertising overall will continue to grow. From a paltry $175 million in 1996 online, advertising rose to $3.6 billion last year and might do double that this year. By 2005, according to an estimate by investment banking firm Lehman Brothers, Inc., it will be $32.3 billion-almost as big as radio and magazines put together, and just shy of cable television and direct mail."
This is a tale of two cities in Internet space, of dot.coms that are "haves" and "have nots." The "haves" benefits from the direct network effects of popularity, having achieved a critical mass in reach. The "have nots" hope to become popular by riding the coat tails of their more popular brethren because advertisers follow eyeballs. The banner ads of the "have nots" plead for you attention. The business model of Internet start-ups who hope to attract visitors and become brand names through advertising is not working. Why?
First, human attention and time is limited. What value proposition does a banner ad convey? It cannot be a simple plea to "let me sell you something, please!" Unless that "something" is something that you already are interested in buying, which is the point of targeting ads, you ignore it. My wife's cousin has persuaded her to click on two banner ads to date. The first is a charitable campaign to end world hunger, nothing like having a lofty goal that can be met by simply aggregating enough "click-throughs," a click-through a day can keep hunger away. The second involved downloading software for call waiting through the Internet, in exchange for a banner ad on your home screen that alternately tells you when calls come in case you want to get back to the party calling or displays a banner ad. Of course, when my wife's cousin persuades my wife that is a direct network effect at work, diffusing an innovation. When banner ads become a means to help you find, connect or buy something that interest you, they work. That is one reason why Yahoo! wants to be the only place you need to go to find, buy, and connect. It's brand and reach drives the "have nots" to "he who hath gets."
Second, the value proposition itself of the Internet dot.com is its competitive advantage. And competitive advantages only exist when they are demonstrated in financial returns. If a dot.com has a unique value proposition, it needs a better business plan than going online and using banner ads to draw business.
The two cities in Internet space of "haves" and "have nots" are differentiated by one key feature: critical mass. Either direct network effects have created critical mass, locking in a sustainable competitive advantage, or they have not. This is a key message for investors.
In this current era of dot.com pessimism, it remains important to distinguish the pearls from the oysters. The short position in the pearl, Yahoo!,increased in the last month from 28.6 million shares to 33.6 million shares, a record high. Investors should expect some FUD. If anyone remains afraid, uncertain, and doubtful about Y!'s future, then you may want to re-read the Network Hunt Report, particularly the section in Part III that discusses advertising and making money. After reading it, if the investor in you still feels the same way, then please do not buy Yahoo!. Y! will survive and prosper without your investment and certainly without me to argue the merits of its investing case.
I hope this helps.
Don |
