WASHINGTON -- It feels like Armageddon on the Internet. People think the end is near, at least for Internet advertising. Even true believers are wondering if Yahoo could go the way of Netscape (sold for parts to rival America Online in 1998) in the wake of Yahoo's second warning that its ad revenues are taking a nose dive.
Merrill Lynch deepened the gloom last week by further slashing its Internet ad forecast, projecting that online ad sales this year will drop a whopping 25 percent. If the Internet's third most heavily trafficked site can't make it, what are the odds are for struggling content sites like Salon.com and TheStreet.com?
I don't buy this doomsday scenario. I'm convinced Internet ads will work, and eventually will be supplemented by subscription fees, allowing content to thrive again on the Web. That doesn't mean the great Internet shakeout won't get bloodier -- it will, by an order of magnitude that will eventually destroy many more popular dot-coms -- but it should trigger attitude shifts that would help online media find a footing.
One major shift is already apparent in the rush by publishers to offer advertisers a bigger, bolder presence on Web pages. The extra space gives online ads more oomph. Another shift will soon follow. Because the crash on Wall Street dried up all that funny money that funded thousands of free Web services, consumers must either pay subscription fees for some content or watch most of it dry up as the Web deteriorates into a babble of chat rooms, blinking ad boxes and e-mail baskets overrun with marketing spam.
The movement toward a mix of bigger ads and subscription fees was evident in the premium service announced this week by Salon. After laying off workers and seeing its stock price plunge, the Web magazine said it is rolling out bigger, more intrusive Web ads and letting readers decide. They can click on the ads (and make an occasional purchase) or pay a $30 annual fee starting next month for a premium site that will strip away the promotions.
"As we all know by now, the Web didn't rewrite all the rules," Salon founder David Talbot told readers. "A free press has its costs."
Salon is among many popular Web sites to debut oversized ad formats in recent weeks. This is what it must have been to watch the birth of newspaper display ads, those huge chunks of newsprint that allow advertisers to do such things as create vast photo galleries of sale merchandise. Web sites began experimenting with their own super-size ads last year, but they used so many different dimensions that advertisers grew frustrated. The industry offered standards only for smaller ads until last month, when the Internet Advertising Bureau agreed to seven new formats. Widespread implementation will take a while because most sites must redesign their pages first.
But the new formats -- mostly twice the size of their puny predecessors -- are harder to ignore and will allow advertisers to quickly convey more information, boosting the likelihood that people will respond in some fashion.
"We are seeing a huge increase in interest from traditional advertisers," said Maggie Boyer, vice president of media for Internet ad agency Avenue A. Like most in the Internet ad industry, Boyer believes the new formats will give advertisers more leeway to be creative in communicating their messages.
On behalf of advertisers, Avenue A's technology tracks response rates to ads across many different Web sites and networks through anonymous "cookie" files. The tracking raises hackles among privacy advocates; Avenue A contends its data show the effectiveness of marketing campaigns.
Conventional wisdom says Internet ads are ineffective because they generate so few click-throughs: Typically fewer than 1 percent of people who see a banner ad click on it. But Avenue A says Web marketing campaigns often help advertisers even when people don't click. Using cookies and special Web "tags," the company's technology can tell if a user who is shown an ad for iWon.com, for example, visits the iWon Web site several days later. It also makes an anonymous record of whether the person registers, leaves an e-mail address, buys anything or uses a site feature such as iWon's new casino.
"Our advertisers like Best Buy can go into their online reports and see exactly how many people clicked on an ad for a digital camera, and how many people who viewed the ad later went and purchased it online," Boyer said. "They can look across their campaigns and see which sites are driving the most traffic and sales."
Procter & Gamble conducted a study with ad network DoubleClick to see what impact Web ads might have on off-line sales. The four-month study contrasted off-line purchases by two groups -- one that was shown online ads, and a control group that saw no ads. It reported a 19 percent increase in purchases of an "impulse food product" among households shown Web ads. Both the Procter & Gamble study and Avenue A's research suggest that sales gains from Web ads were even bigger among repeat customers.
How people react to the revamped Internet ads and new subscription offers will have enormous influence over the future of the commercial Internet. We are in the earliest stages of a fresh round of subscription offerings that are likely to fare better than they would have in the midst of all the free services.
Meanwhile, debate continues over whether the decline in online advertising is the temporary result of the bursting of the investment bubble -- or a sign of fatal flaws in the medium itself. I'm convinced it is part of an economic cycle, one that hits the overall media industry with annoying regularity. Merrill Lynch projects this year will be the first since 1992 when overall advertising growth will be less than that of the nation's gross domestic product. And you can bet your last share of Internet stock that traditional media, like Internet publishing, will not emerge from this downturn unscathed.
As advertisers get smarter about measuring the impact of new-media campaigns, the Internet likely will siphon ad spending from traditional media, albeit more slowly than predicted during Internet mania. Forrester Research forecasts that digital marketing (both Web ads and direct e-mail pitches) will cannibalize $40 billion from off-line media during the next five years, partly because mass-audience advertising will start to seem enormously expensive when companies can actually measure their return on each and every ad.
I still buy that scenario, which is hardly Armageddon for the Internet.
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Walker's e-mail address is walkerl(at)washpost.com
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