When markets change, so do the ways to make money in those markets. Historically, new business models evolve during months and years as players change strategies and market structure. The Internet advertising industry is experiencing this now.
According to the Internet Advertising Bureau, the 1999 U.S. advertising revenues are expected to amount to $4 billion, growing at an amazing annual rate of 120 percent to 130 percent. However, it’s not just a growing market, it is also a continuously changing market.
As Net users mature, they change their Net behavior. Consequently, advertisers need to change, and ad agencies need to find new ways to communicate with customers. It also means that the ad industry quickly needs to adopt new business models and new ways to make money.
The basic revenue stream for the Internet ad industry is banner advertising. It’s still very profitable for the advertising industry, but questionable in its efficiency from the advertisers’ point of view. Advertisers pay $5-100 CPM (cost per thousand impressions, or the number of times someone watches the banner) depending on how sophisticated the targeting is.
At the same time, the average click-through rate for banner ads is falling. Presently, it is below 0.5 percent according to Nielsen Netratings (only 5 out of 1000 visitors to a site clicks on a banner ad.) This means that advertisers pay $1 to $20 per click. That’s very expensive, and as the click-through rate continues to fall, standard banner advertising gets increasingly expensive.
The ad agencies’ reaction to this has been to find new, more creative type of deals with major advertisers. For example, the agency gets a percentage of the increase in sales when the banner ads are running. It implies that someone buys a pair of shoes because banner ads are running. The connection between ad agency reward and ad efficiency can be challenged. Advertisers should be concerned.
Basically, the banner ad is a concept in great need of revitalization, and that’s why the evolving online entertainment industry has generated so much attention from the advertising community. Entertainment-based advertising will create higher impact at lower costs.
A growing number of small studios have pioneered production of entertainment content specifically designed for the Internet. The major studios will soon follow, since the market is likely to explode: more than 75 percent of American Internet users have already watched online entertainment and 90 percent will do it during this year, according to a recent study by the E-Business Unit of the Cap Gemini Group and Honkworm International, an online entertainment studio. Though still in it’s infancy, this high-growth multi-billion dollar market will probably be a savior for advertisers – and a major challenge for ad agencies.
The online entertainment industry makes money in three basic ways: pure content syndication, product placement and streaming ads. Due to the infancy phase, most of the revenue has so far been generated through either product placement (content featuring a main sponsor’s products or services) or syndication of pure (non-ad) content to e.g. portals or e-greeting cards.
However, as the market matures and the Net users are starting to consume more online entertainment on a regular basis (they start to know what they want and where they can find it), the streaming ad revenues will rapidly increase
and become the industry’s dominant revenue generator.
The change in consumers’ entertainment consumption will probably make major advertisers shift ad investments to the Internet faster than expected.