Here's an interesting interview on online advertising:
<Picture>StreetBeat
StreetBeat is designed to provide you with additional insights on the market from recognized financial experts on (and off) Wall Street. Please note that the views and opinions expressed by the panelist below are not necessarily those of Briefing.com.
Topic: Internet Advertising
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Panelists
Michael Hess, CEO/Sales Director at WebRep, LLC.* Sherri L. Wolf, Internet Analyst at Adams Harkness.
Q&A
Briefing: While there is a broad consensus that ad spending on the Internet will surge in the next five years, so will the number of sites and page impressions. Do you think that ad rates can be sustained at current levels in this environment?
Michael Hess: Only sites that prove to be "commercially viable" will be able to safely rely on advertising as their primary revenue source. In this light, the definition of "commercially viable" would describe sites that are able to combine a critical audience mass with a strong editorial proposition. It's not enough to say large successful media companies like Time Warner, Hearst, Disney, et. al. will be able to automatically transfer their business to the web as this media requires a unique approach given its organic, real time nature. Further analysis shows that although the web is a huge arena of specialized information, the players who may win big are those who serve as aggregators. Even though many smaller players can exist, their success will always be proportionate with the critical mass they are able to reach. A site that specializes in South American fly-fishing may eventually drive a consistent ad revenue stream, but if they're only reaching 100,000 individuals, the math just won't support big dollars even considering a premium to reach such a "target market". With rates hovering in the mid $30s (cost per thousand), how is this publisher going to drive big dollars reaching 100k individuals every month? But if there's a mega-outdoor site and it is the "go-to" site on the web offering everything for outdoor enthusiasts, then they have a chance to be the "Sports Affield" of the web and reach millions of people. I like the math better when I multiply $30 by millions than when multiplying by a hundred-thousand. The ultimate irony, and challenge for the web, is found in the nature of the web: the content is so specialized so there's bound to be audience fragmentation which, of course, means ad dollar fragmentation.
Sherri Wolf: Sixty percent of all advertising revenue on the Net goes to the Top 10 sites. Within this group, companies such as Yahoo!, Infoseek, Lycos, and Excite are among the better known players. For these companies, and the others, we believe they will be able to sustain ad rates. Moreover, as the number of sites increase, and more companies begin to advertise, we think the top 10 sites will continue to own a disproportionate amount of the ad dollars as they will be able to capitalize on their brand name.
Briefing: To what extent will marquee sites such as the search engines be able to sell ad space without the help of an agency? Will Internet advertising firms be able to keep such business at current commission rates?
Michael Hess: The first question is not accurately worded as it's not really a dependence on selling agencies that will dictate the success of the search engines. Further, ad vernacular assumes "buying agents" when the term "agency" is used. Although "agency" can refer to a sales entity like a DoubleClick, WebRep, et. al., there must be an appreciation between buyers (ad agencies) and sellers. A web publisher has two choices for its sale strategy: it can build an in-house, dedicated sales force, or, it can outsource the function to a sales firm like WebRep. Web publishers like Yahoo! would rather have their own dedicated online ad sales staff than out-source its function to a "selling agency" like WebRep. Yahoo is large and doesn't want to "share" a sales force with other publishers. However, independent sales firms like WebRep have a strong place on the web as most web publishers have no clue about how to build an ad sales force nor do they want to spend the big dollars it takes to do so.
What I think you mean is how successful will the search engines be in general selling advertising? The anwser, in my opinion, is that they will continue to thrive if they can grow their brand and offer diverse services/editorial, etc. In the sense that the engines are able to serve as a "gateway" or a "community" to a large audience base, then they'll be successful as advertisers are looking for mass penetration and affinity between the content provider and the user.
The second part of the question is rather confusing as "commissions" refers to how much an independent sales agent like WebRep charges for its services. This is a completely different concept versus what will happen to ad rates in general. The answer to both questions is a function, as always, of supply/demand. Regarding rates, if there continues to be four major engines (Yahoo, Infoseek, Excite and Lycos), they will share the pot of money an advertiser appropriates toward "engines". If, however, two of the four can't make money by competing against each other, then let's say the four will merge into two; now we have two media properties competing for the same amount of dollars earmarked by an advertiser for that category. Rates for the engines will not increase as long as the situation is what it is with four players in the game. However, eventually they can raise rates if the market of providers shrinks. This is why their strategic decisions are so important as it could be the difference between building a strong brand or doing things to alienate customers. For the short term anyway, my position is rates will continue to stay where they are for one reason: we've reached a point where no more media players can be introduced into the mix at this point; even though you and others contend that "more" pages and sites are coming on board, the game as it pertains to advertisers is defined now by how many more "publishers" can come in and do what Briefing does? - none I would say. How many more publishers in general can come on board and do it better than the strong, BIG web media players (Pathfinder, Disney, et. al.) or the strong, SMALL web publishers (c|net, Briefing, iVillage, et. al.)? If anything, the choices an advertiser has will diminish as smaller companies realize they can't make the millions they thought were waiting for them on Madison Avenue. The next step for the smaller publishers trying to compete may be aggregation. The smaller publishers who are having problems showing a positive ROI will seek partnerships with larger companies or category aggregators. It's classic Darwinism.
Sherri Wolf: As time goes on, search engine companies will have to improve their ability to target ads better. Already, though, we are seeing efforts from them to do just that. A case in point is Lycos which aligned with Engage Technologies and also just bought WiseWire, a company whose software allows Internet users to do customized searches. Another example is Excite which, in March, bought MatchLogic, an online advertising management services firm, enabling advertisers to easily achieve effective, one-to-one communications with consumers on the Internet. Companies like the main search engines, though, are in a good position because they have the funding necessary to improve their business through acquisitions; thereby, enabling them to avoid having to use an agency.
Briefing:Though we have all heard about the bright future for advertising on the Net, concerns exist about the past and present. How have total spending and ad rates performed and what companies have emerged as the key players in the industry?
Michael Hess: As we've discussed here, even though most Fortune 500 companies have only dipped their big toe in the market, most web publishers have already realized Madison Avenue won't be funding their retirement package. But of course you're saying: "Michael, you just told me the number of players will be shrinking and dollars will be increasing. Are you crazy?" (A little bit, yes.) Follow me on this: The Catch-22 of the web is that everyone owns a printing press...this doesn't mean everyone CAN BE a successful publisher. Again, it comes down to critical mass and unique editorial positioning backed by some big marketing dollars. Having said all of that, I remain extremely bullish about ad expenditures as they have to continue to go up - there's no way the web won't experience incredible exponential growth. The problem occurs, as with every industry, with the "have" and "have-nots." Experienced media companies who know how to "produce" content and entertainment will garner the bigger ad dollars. It's no different than in any other media. To truly appreciate my point, go back to the South America fly-fishing site....could be a great site, the best in its breed, but if there's no critical mass, how much fun is it banging your head for a few thousand dollars each month?
Sherri Wolf: For a number of quarters now, ad rates have really been flat. Yet, once search engines provide better targeting, we expect they will be able to increase ad rates. Among the key players having emerged are companies such as Yahoo!, Excite, Lycos, Infoseek, and GeoCities.
Briefing: Which stocks are you recommending and/or avoiding?
Sherri Wolf: I am not avoiding any of the stocks as I believe one can pick the leading companies in this industry, and capitalize on their growth prospects. One stock, in particular, that I like and have a BUY rating on, is CMG Information Services (CMGI). CMG is a diversified company that is able to take advantage of all trends on the Internet from ad spending to electronic commerce. In addition, this should be the year in which they'll be monetizing some of their investments into shareholder value.
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* WebRep is the Internet advertising agency for Briefing.com
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