Online Advertising’s Great Digital Race

Looking Ahead

In the last couple years, digital advertising has looked a little like an ultramodern version of the great race to the west coast.

Are there any corners left in the online world where advertisers can plant a flag? In the great digital race to monetize the Web, what will they think of next? Plenty.

Although it would be wrong to say that digital advertising is still in its infancy, it is still a young industry. By most accounts, online advertising still represents less than 10 percent of companies’ overall corporate ad budgets.

Looking ahead to 2008, it is hard to steer clear of the ominous talk of recessions, credit crises and the attendant mortgage fallout. The Fed’s been cutting rates and the president has pledged to freeze the rates of hundreds of thousands of subprime borrowers who got swept up in the real estate boom in the first half of the decade. All to forestall a potential recession that some analysts warn is inevitable.

The belt-tightening is already underway, according to reports from two of the world’s largest advertising groups. Universal McCann and ZenithOptimedia predict that overall ad spending will see only modest growth next year, but that the industry will not enter recession.

The outlook may be somber for the ad industry at large, but analysts look for online spending to buck the trend.

eMarketer has projected online ad spending to roughly double over the next four years, and analysts universally agree that companies will shift more of their ad budgets to new media.

“Don’t expect any large growth in total media,” eMarketer’s David Hallerman said. “The shift away from traditional media is accelerating.”

So companies are spending more money on new modes of advertising. The most reliable of the digital ad formats is, of course, search.

The largest single category, search advertising accounts for about two-fifths of all digital ad spend, about twice as much as banner ads and online classifieds.

But, like a fifth-year senior in high school, those three categories are the oldest of the young. They are established, understood, and relatively unchanging. Smart companies send their ad dollars where their customers are going, so they will certainly spend more money on the big three, but there will not be much talk of a revolutionary new ways to place search ads or banners. Contextual and behavioral targeting will continue to improve, reducing ad waste, but those media strategies have become self-sustaining.

So what, then, will be the challenges of 2008? Which trees will the executives be shaking next year to get the ripe fruit to fall?

Next Page: Video May be Huge, But Where’s the Business Plan?

Looking Ahead

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Internet video is huge, but its monetization is not. Yet.

Pre-roll ad placements on online video are annoying, no question. Mid-roll ads are even worse. Post-roll ads are easy to skip.

No successful model for ad placement on online video has yet emerged, but companies are working on it.

Look for innovation on this front, continuing what we’ve already seen this year. For example, in 2007, AOL announced its video ticker ads, which entice a user to click on the branded message to launch an advertisement. The operative feature of ticker ads is that they do not obstruct the viewing experience.

In that sense, they are similar to search ads: if you want to click, click; if not, go on about your business. In October, Google launched video for AdSense, featuring a ticker component.

Tickers are one alternative to the problem highlighted in an IBM study, in which 40 percent of respondents said that video ads that disrupted the content are the single most irritating ad format.

Alienating consumers is an unlikely formula for advertising success, but ads are coming to online video, like it or not.

“People are beginning to realize that free content isn’t free,” said Bob Walczak, CEO of MoPhap, an emerging player in mobile advertising.

More advertising means more content will become available. Television programming already accounts for 65 percent of the video content that people watch on their computer and mobile devices, according to a recent report from media research group ChoiceStream.

The fractious world of online video will see some big changes and considerable standardization in 2008 thanks to a recent announcement from Nielsen. The Digital Media Manager Service, set to go live in mid-2008, will allow media companies to track the distribution of their videos across the Internet through digital fingerprinting and watermarking technologies.

Initially, the technology will give companies like Viacom the ability to police their copyrights and block the unlawful distribution of their content on sites like YouTube.

Nielsen is also counting on the system to drive the monetization of online video through advertising. The full launch is not expected until the middle of next year because for the system to work as Nielsen anticipates, YouTube and other social-media sites will have to sit down at the table and break bread with the television broadcasters.

With Nielsen already tracking 95 percent of all television programming, and that content making up the significant majority of all online video, the transformative potential for video advertising on the Web is significant.

The system would keep track of how many people are watching a video and on which sites – precisely the kind of data that creates measurable pricing criteria for an ad spend.

If the social media sites see the value in Nielsen’s system and work with content owners to create rules for automatic ad placement, online video might finally find its value proposition.

Next page: Advertising in your pocket?

Looking Ahead

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Advertising You Can Take With You

Rich-media spending is currently about 8 percent of companies’ advertising budgets. It is the fastest-growing segment within the digital-advertising landscape, but by sub-segment, it is overwhelmingly dominated by video.

Mobile advertising is resource still largely unmined, and while 2008 is unlikely to be the breakout year for mobile, it will nonetheless draw considerable attention from companies large and small.

Mobile advertising in the United States lags significantly behind other markets, particularly Asia, where phones are more advanced and much more widely used as a full-fledged computing device.

Mobile advertising will get a boost from the introduction of more sophisticated devices, prime example this year of course being Apple’s iPhone. With more phones that can handle more data-intensive applications with a navigable interface and high-quality screen, more applications and content will become available, and the mobile space will be increasingly fertile ground for advertisers.

But the real growth for mobile advertising will have to wait until more people use their phones like they use their computers. Of the roughly 233 million mobile phones in the United States, some 185 million enable the Wireless Application Protocol (WAP) – the mobile standard for accessing the Internet on a phone, and only 12 million are video enabled, according to Ben Ezrick, senior strategist of digital innovation at the Ogilvy agency.

Further, there is a huge disparity between the number of mobile customers whose phones are capable of connecting to the Internet, and those who actually subscribe to a data plan.

More engaging applications and content will encourage more people to purchase data plans, which will in turn increase mobile ad spending, but the main drag on the mobile ad market is the wireless carriers and their “walled garden,” said MoPhap’s Wolczak.

Wireless providers have been trying to control their networks from end to end, which has had the effect of choking off the development of new mobile applications and content, according to Wolczak, whose New York-based company operates as a mobile-ad-placement service.

His biggest prediction for 2008 is that a significant “chunk will be taken out of the carriers’ walled garden.” Some rosy news on that front came with the November announcement from Verizon Wireless that it would open its network to outside developers in 2008. If AT&T follows suit, mobile advertising would be poised for a great boom.

Though it’s still a highly speculative topic, mobile advertising has drawn some very real attention from the big kids. In December, Microsoft announced the launch of a limited mobile ad program, following similar moves by rivals Google and Yahoo.

The effectiveness of mobile ads has some very immediate limitations, however.

Only some 5 percent to 10 percent of phones in use in the United States are sophisticated enough to handle a browser cookie, which makes the contextual ad placement that launched the Google empire difficult to carry over from the PC to the phone.

There is also some concern over where the location tracking via GPS-enabled devices or cell-tower triangulation could lead mobile advertising.

Certainly, Best Buy would love to send a coupon or a sale promotion to a documented gadget lover as he happens to be walking toward one of their stores. But what of the Big Brother effect such location-targeted ads could create? Will they be seen as convenient, or just plain creepy?

Whatever the answer, it’s a sure bet that location-targeted ads are coming soon to a phone near you.

The social side

In 2007, more brands sought to drive engagement by positioning themselves as part the conversations among consumers.

This push to break down the barrier between company and customer played out on many fronts: social networks, user-generated content sites and through consumer-generated ad (CGA) campaigns.

The CGA phenomenon is an intriguing one, because is built on some of the core elements of Web 2.0: pluralism, rich media and the organic buzz of viral communication.

From a marketing standpoint, CGA campaigns are built to drive engagement with a brand. A company like Heinz launched its “Top This” YouTube campaign, where consumers answered the call and submitted their own ads for Heinz ketchup.

Imagine – getting your customers to advertise for you!

CGA campaigns are fun, frothy and they undeniably create a strong bond between the participants and the brand. Who, after all, would go to the trouble of shooting, editing and submitting an ad for Heinz ketchup and then buy a generic in the grocery store?

There has been some talk of CGA campaigns putting an in-house marketing team on light duty, and even disintermediating the outside ad agency entirely.

Not so, say many industry insiders. Advertisers and their agencies are still very much involved in any CGA campaign, even if the creative is turned over to the consumer.

They are still the shepherds of the brand, and they still have to market and manage the campaign. After all, who is responsible for reviewing all the submissions?

Moreover, the payoff is still relatively small, and notoriously difficult to measure. The metrics needed to assess the value of any viral campaign are still in a very rudimentary stage, but the early results suggest that CGA campaigns will remain little more than a whimsical sideshow for the foreseeable future.

That said, advertisers go where there customers are, so more companies can be expected to experiment with CGA campaigns in 2008, even if it’s a microcosm of the overall ad budget.

A more serious Web 2.0 opportunity is the insertion of ads into social networks. MySpace has its hypertargeting program to deliver ads to its 110 million users.

Facebook, with a membership that is about half the size of MySpace but growing much faster, announced in November its Social Ads platform, featuring the Beacon program to enable partner companies to send purchases that members made to their news feeds. Facebook CEO Mark Zuckerberg heralded Beacon as an advertising “revolution.”

But Beacon blew up in Zuckerberg’s face when people saw that companies were sending the details of gifts that they’d bought their friends to their feeds, for everyone to see.

Privacy advocates were outraged, and Zuckerberg finally apologized for the way Beacon was rolled out and the way his company responded to the criticism.

The Beacon controversy highlighted what could well serve as a mantra for online advertising in the social world: Don’t alienate the people you’re trying to befriend.

Trust may be the most important aspect of the relationships that advertisers are trying to built with consumers as they launch social campaigns. Remember, CGA and other social-oriented online campaigns are about repositioning the brand as one of the gang, not the faceless corporate entities many of us still think of when advertising comes to mind.

Forward-looking ad executives recognize that Internet users are generally a savvy bunch, and they don’t react well to disingenuousness. Companies that try to launch social campaigns without laying their cards on the table about data collection and sharing, privacy policies and what exactly happens when you opt out do so at their own peril. They will be the losers in 2008, but look for more openness, because Facebook has already written them a textbook case study of how to do it wrong.

Privacy: Never enough

The Facebook saga gave the privacy advocates a fabulous example of the troubling aspects of the intersection of social about which they have been warning for some time.

Groups like the Center for Digital Democracy (CDD) and the Electronic Privacy Information Center (EPIC), which have been lobbying against the Google/DoubleClick merger since it was announced in April, call for complete openness in the data collection policies of companies like Google and Facebook.

They are warning that when commercial interests come in to play (read: advertising), the companies involved cannot be trusted to police themselves regarding how that data is used and distributed.

Members of social networks, the majority of which fall in to a prime demographic, create profiles where they share a wealth of personal information about themselves, such as age, occupation and location, to say nothing of the spate of consumer preferences they share about what electronic devices they like and dislike, what restaurants they enjoy, where they travel, what movies they like, and on, and on, and on…

Best of all, this information is all place in the same neatly packaged silos that advertisers have worked tirelessly over the years to create. If anyone’s going to be disintermediated in this process, it’s not the agency but the focus group.

To the CDD and EPIC, the application of this data for commercial ends is a supremely troubling prospect. They claim that the free market does not do enough to protect consumers’ data, and that government oversight and regulation is necessary.

As of this writing, they are both conducting extensive research in preparation for the formal complaints they plan to file with the Federal Trade Commission and other regulatory bodies in January.

This friction is not likely to work itself out, because the privacy groups are unflinching in their insistence on government intervention.

The FTC is likely to approve the Google/DoubleClick merger early next year, though there is still the possibility that the Department of Justice could intervene to block it.

Analysts say that that’s unlikely, but the specter of government action to step in and start poking around in what Google is actually doing with the troves of data it’s collecting.

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