Impact of Internet Advertising

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	{{concept}}		{{concept}}
	[[Category:Mature]]		[[Category:Mature]]
-	The breadth of U.S. advertisers across virtually all industries means that growth of advertising spend is highly correlated with the GDP, a measure of the country's productivity. The story becomes different when disaggregating advertising spend by channel. While TV, direct mail and newspapers account for nearly three-fourths of all advertising spending combined, the Internet channel has grown the fastest since 2001, taking share away from most traditional channels. Internet advertising grew at an annual clip of 18% from 2001-2006 and only cable TV (10%) was close to a double digit growth rate. Other channels basically kept pace with GDP growth (about 3%), with newspapers (1%) and radio (2%) most negatively affected.	+	The breadth of U.S. advertisers across virtually all industries means that growth of advertising spend is highly correlated with the GDP, a measure of the [[U.S. Economic Cycles|country's productivity]]. The story becomes different when disaggregating advertising spend by channel. While TV, direct mail and [[Print Publishing Industry|newspapers]] account for nearly three-fourths of all advertising spending combined, the Internet channel has grown the fastest since 2001, taking share away from most traditional channels. Internet advertising grew at an annual clip of 18% from 2001-2006 and only cable TV (10%) was close to a double digit growth rate. Other channels basically kept pace with GDP growth (about 3%), with newspapers (1%) and radio (2%) most negatively affected.
	[[image:Advertising_Share_by_Channel_-_US,_2006.jpg|thumb|400px|right]]		[[image:Advertising_Share_by_Channel_-_US,_2006.jpg|thumb|400px|right]]
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	==Efficiency and Effectiveness==		==Efficiency and Effectiveness==
-	Advertising on the Internet has the dual benefit of being generally more efficient and effective compared to other media channels. A standard advertising cost metric is CPM or Cost per Thousand Impressions. For example, a $1 CPM equates to a cost of $1 to reach 1,000 theoretical viewers or readers (theoretical because not everyone will read or look at an advertisement). Internet CPM rates in 2006 averaged $6, much less than most traditional media (see table below). Compounding this lower cost is the effectiveness of Internet advertising, which can be measured using a variety of tracking methods. An advertiser can tell, for example, who clicked on an Internet ad and even who bought a product or service during an internet session. Companies such as Google and Yahoo! have leveraged the measure-ability of the Internet to charge advertisers for clicks rather than impressions, further attracting advertisers with its pay-for-performance model. On the other hand, it is extremely difficult to measure how effectively television, newspaper, radio or magazine ads drive sales.	+	Advertising on the Internet has the dual benefit of being generally more efficient and effective compared to other media channels. A standard advertising cost metric is CPM or Cost per Thousand Impressions. For example, a $1 CPM equates to a cost of $1 to reach 1,000 theoretical viewers or readers (theoretical because not everyone will read or look at an advertisement). Internet CPM rates in 2006 averaged $6, much less than most traditional media (see table below). Compounding this lower cost is the effectiveness of Internet advertising, which can be measured using a variety of tracking methods. An advertiser can tell, for example, who clicked on an Internet ad and even who bought a product or service during an internet session. Companies such as [[Google]] and [[Yahoo!]] have leveraged the measure-ability of the Internet to charge advertisers for clicks rather than impressions, further attracting advertisers with its pay-for-performance model. On the other hand, it is extremely difficult to measure how effectively television, newspaper, radio or magazine ads drive sales.
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	|$7		|$7
	|-		|-
-	|Magazine	+	|[[Print Publishing Industry|Magazine]]
	|$11		|$11
	|-		|-
-	|Newspaper	+	|[[Print Publishing Industry|Newspaper]]
	|$26		|$26
	|-		|-
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	==Click Fraud==		==Click Fraud==
-	Pay-per-click (PPC) Internet ad companies face threats from click fraud, which artificially inflate the prices paid by advertisers and benefit the advertising companies such as Yahoo! and Google, which generate revenue from clicks. Both of these companies have settled several lawsuits claiming that the company did not do enough to stem click fraud. It is currently under debate how much of their PPC business is fraudulent.	+	Pay-per-click (PPC) Internet ad companies face threats from click fraud, which artificially inflate the prices paid by advertisers and benefit the advertising companies such as [[Yahoo!]] and [[Google]], which generate revenue from clicks. Both of these companies have settled several lawsuits claiming that the company did not do enough to stem click fraud. It is currently under debate how much of their PPC business is fraudulent.
	==Emerging channels==		==Emerging channels==
-	Video games and mobile phones are two channels that may threaten or accelerate Internet advertising companies. [[Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii|Console video games]] (i.e., PlayStation, Xbox, and Wii) are increasingly connected, and Internet-based games themselves (e.g., large online multiplayer games) have risen in popularity. In addition, mobile phones are one of the most popular devices in the world and have increased in capabilities through technology such as 3G, which enables a wide range of activity such as email, Internet browsing, and multimedia capabilities. Advertising on these channels is a small but rapidly growing trend. Internet advertising companies such as MSN and Yahoo! may benefit from these trends if they build capabilities to leverage these channels; otherwise, these emerging media may take share away from "traditional" Internet advertising as advertisers seek innovative ways to reach potential customers--for instance, mobile advertising has the benefit of being location-based and highly targetable.	+	Video games and mobile phones are two channels that may threaten or accelerate Internet advertising companies. [[Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii|Console video games]] (i.e., PlayStation, Xbox, and Wii) are increasingly connected, and Internet-based games themselves (e.g., large online multiplayer games) have risen in popularity. In addition, [[Mobile Phone Adoption in Developing Countries|mobile phones are one of the most popular devices in the world]] and have increased in capabilities through technology such as [[3G]], which enables a wide range of activity such as email, Internet browsing, and multimedia capabilities. Advertising on these channels is a small but rapidly growing trend. Internet advertising companies such as [[MSFT|MSN]] and [[Yahoo!]] may benefit from these trends if they build capabilities to leverage these channels; otherwise, these emerging media may take share away from "traditional" Internet advertising as advertisers seek innovative ways to reach potential customers--for instance, mobile advertising has the benefit of being location-based and highly targetable.
	==Channel Maturation==		==Channel Maturation==
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	* Traditional media companies such as [[Time Warner]], [[Viacom]], [[Walt Disney Company (DIS)]], [[News Corp]] and [[CBS]] depend heavily on advertising in traditional channels. Some media companies, however, are more exposed than others and several have even focused on building up their own Internet property portfolio.		* Traditional media companies such as [[Time Warner]], [[Viacom]], [[Walt Disney Company (DIS)]], [[News Corp]] and [[CBS]] depend heavily on advertising in traditional channels. Some media companies, however, are more exposed than others and several have even focused on building up their own Internet property portfolio.
	** [[CBS]] is particularly dependent on traditional advertising, which drives over 70% of their overall revenue.		** [[CBS]] is particularly dependent on traditional advertising, which drives over 70% of their overall revenue.
-	** Newspaper companies such as the [[New York Times]] have suffered losses in both print advertising and subscription revenue as readers increasingly seek news online. In addition, a large portion of their online advertising business depends on advertising companies such as Google, which provide the inventory of ads and advertisers for sites such as About.com and NYTimes.com (Google shares the revenue generated by such ads).	+	** [[Print Publishing Industry|Newspaper]] companies such as the [[New York Times]] have suffered losses in both print advertising and subscription revenue as readers increasingly seek news online. In addition, a large portion of their online advertising business depends on advertising companies such as Google, which provide the inventory of ads and advertisers for sites such as About.com and NYTimes.com (Google shares the revenue generated by such ads).
	* Major advertising agency conglomerates such as [[Publicis]] and [[Omnicom]] source a large portion of revenue from media buying. If Internet advertising continues to put pricing pressure on more expensive media channels (such as newspaper and TV), traditional agencies' revenues may be negatively affected.		* Major advertising agency conglomerates such as [[Publicis]] and [[Omnicom]] source a large portion of revenue from media buying. If Internet advertising continues to put pricing pressure on more expensive media channels (such as newspaper and TV), traditional agencies' revenues may be negatively affected.
-	* Paper companies who provide stock for newspapers, magazines, yellow pages, and direct mail may see business decline, as the Internet continues to take advertising away from print media. Several newspapers such as the Wall Street Journal have also moved to reduce the size of their physical newspaper.	+	* Paper companies who provide stock for newspapers, magazines, yellow pages, and direct mail may see business decline, as the Internet continues to take advertising away from print media. Several newspapers such as the [[Dow Jones (DJ)|Wall Street Journal]] have also moved to reduce the size of their physical newspaper.
	[[category:Technology & Internet]]		[[category:Technology & Internet]]
	[[category:Media & Entertainment]]		[[category:Media & Entertainment]]

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Revision as of 04:18, October 3, 2007

The breadth of U.S. advertisers across virtually all industries means that growth of advertising spend is highly correlated with the GDP, a measure of the country's productivity. The story becomes different when disaggregating advertising spend by channel. While TV, direct mail and newspapers account for nearly three-fourths of all advertising spending combined, the Internet channel has grown the fastest since 2001, taking share away from most traditional channels. Internet advertising grew at an annual clip of 18% from 2001-2006 and only cable TV (10%) was close to a double digit growth rate. Other channels basically kept pace with GDP growth (about 3%), with newspapers (1%) and radio (2%) most negatively affected.

Efficiency and Effectiveness

Advertising on the Internet has the dual benefit of being generally more efficient and effective compared to other media channels. A standard advertising cost metric is CPM or Cost per Thousand Impressions. For example, a $1 CPM equates to a cost of $1 to reach 1,000 theoretical viewers or readers (theoretical because not everyone will read or look at an advertisement). Internet CPM rates in 2006 averaged $6, much less than most traditional media (see table below). Compounding this lower cost is the effectiveness of Internet advertising, which can be measured using a variety of tracking methods. An advertiser can tell, for example, who clicked on an Internet ad and even who bought a product or service during an internet session. Companies such as Google and Yahoo! have leveraged the measure-ability of the Internet to charge advertisers for clicks rather than impressions, further attracting advertisers with its pay-for-performance model. On the other hand, it is extremely difficult to measure how effectively television, newspaper, radio or magazine ads drive sales.

2006 CPM Rates (Unweighted)

Media Channel	2006
Internet	$6
TV (Network, Cable)	$18
Radio (Network, Spot)	$7
Magazine	$11
Newspaper	$26

Click Fraud

Pay-per-click (PPC) Internet ad companies face threats from click fraud, which artificially inflate the prices paid by advertisers and benefit the advertising companies such as Yahoo! and Google, which generate revenue from clicks. Both of these companies have settled several lawsuits claiming that the company did not do enough to stem click fraud. It is currently under debate how much of their PPC business is fraudulent.

Emerging channels

Video games and mobile phones are two channels that may threaten or accelerate Internet advertising companies. Console video games (i.e., PlayStation, Xbox, and Wii) are increasingly connected, and Internet-based games themselves (e.g., large online multiplayer games) have risen in popularity. In addition, mobile phones are one of the most popular devices in the world and have increased in capabilities through technology such as 3G, which enables a wide range of activity such as email, Internet browsing, and multimedia capabilities. Advertising on these channels is a small but rapidly growing trend. Internet advertising companies such as MSN and Yahoo! may benefit from these trends if they build capabilities to leverage these channels; otherwise, these emerging media may take share away from "traditional" Internet advertising as advertisers seek innovative ways to reach potential customers--for instance, mobile advertising has the benefit of being location-based and highly targetable.

Channel Maturation

Internet penetration and total page views in the U.S. have slowed in recent months, potentially signaling channel maturation. Internet advertising depends heavily on online traffic and if these trends continue, advertising spend on this may not grow at the same rate as recently (18% per year from 2001-2006).

Who Benefits from Internet Advertising

• Online ad companies such as Google, Yahoo! and Microsoft's MSN account for a large portion of all PPC advertising (mostly search). Google in particular dominates the field, growing at a faster rate than Internet advertising overall while maintaining its leading position in the industry.
• Media companies with less exposure to traditional advertising and a greater dependence on other revenues drivers such as subscription (e.g., cable TV, satellite radio, premium newspapers) may benefit relative to their peers.
  • Time Warner derives a larger portion of business outside of advertising compared to other media conglomerates. Even within its advertising business, the company is more heavily exposed to the Internet (13% of revenue from traditional advertising, about half of which is digital).
  • The Dow Jones company, publisher of the Wall Street Journal, is ahead of its newspaper peers in terms of penetration into Internet advertising and online subscription revenue across its various properties such ask WSJ.com
• Companies such as Cisco and Juniper provide infrastructure products and services for the Internet. If Internet traffic--and hence, advertising--grows, then these companies may benefit for the demand of higher bandwidth and faster connections (e.g., online videos)
• Advertising agencies focused on Internet advertising would benefit from the increase in agency services in this space. aQuantive, a leading online advertising agency, was purchased by Microsoft in May 2007 at nearly double their market price previous to the announcement.

Who Loses Out

• Traditional media companies such as Time Warner, Viacom, Walt Disney Company (DIS), News Corp and CBS depend heavily on advertising in traditional channels. Some media companies, however, are more exposed than others and several have even focused on building up their own Internet property portfolio.
  • CBS is particularly dependent on traditional advertising, which drives over 70% of their overall revenue.
  • Newspaper companies such as the New York Times have suffered losses in both print advertising and subscription revenue as readers increasingly seek news online. In addition, a large portion of their online advertising business depends on advertising companies such as Google, which provide the inventory of ads and advertisers for sites such as About.com and NYTimes.com (Google shares the revenue generated by such ads).
• Major advertising agency conglomerates such as Publicis and Omnicom source a large portion of revenue from media buying. If Internet advertising continues to put pricing pressure on more expensive media channels (such as newspaper and TV), traditional agencies' revenues may be negatively affected.
• Paper companies who provide stock for newspapers, magazines, yellow pages, and direct mail may see business decline, as the Internet continues to take advertising away from print media. Several newspapers such as the Wall Street Journal have also moved to reduce the size of their physical newspaper.

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