Economic issue: internet advertising

FINANCIAL TIMES NOVEMBER 2 2004

Growth at different speeds

The medium is evolving as companies experiment with various strategies, says Louisa Hearn

Looking for an advertising growth story? It's still the internet, stupid. Internet advertising revenues are continuing to rise.

In the UK they grew by 76 per cent year-on-year in the first half of 2004. According to PwC and the Internet Advertising Bureau, the medium accounted for Ј267m ($490m) or 3.2 per cent of all UK display advertising and is starting to gain ground against radio.

Yet take a closer look and the picture that emerges is not one of uniform expan­sion across sectors or even in all types of web advertising. Instead, some companies are investing heavily in specific kinds of web campaigns as a way of realising a competitive advantage – while other businesses and sectors are much more cautious.

In one camp are businesses such as Royal Mail's Parcelforce, mobile phone operator O₂ and BMW. While they are shy about breaking out their internet spending, these businesses, are allocating "substantial" shares of their marketing budgets to the internet to enhance the impact of existing television, press and poster advertising.

In the case of brands such as O₂, web campaigns – created by Agency Republic – are designed to be consistent in look and feel with other O₂ messages. James Cooper, creative director at Agency Republic, says. “Even if a message is about a music player, the audience still sees the O₂ brand out there.”

Case studies from online media owners such as MSN have also pointed to the “multiplier” effect in terms of consumer awareness that can be gained when traditional branding campaigns on TV or in the press are backed by the web.

Yet according to PwC, the fastest-growing area of web advertising both in the UK and the US is not brand-driven formats such as online pop-ups and banners, but search-related campaigns. These are, typically, where an advertiser pays to sponsor individual key words on internet search engines such as Google or Yahoo. When the site throws up its results, the advertiser's brand appears – labelled as a sponsored result – onscreen among the other information.

PwC estimates that paid-for search online advertising represented 40 per cent of all online advertising in the US in the first half of 2004. In the UK, the figure is almost 41 per cent. Amanda Jones, head of search at digital marketing agency i-level, says: “Paid search is our fastest-growing area.”

Although sceptics complain that advertising messages and search results can be poorly matched, search has increasingly persuaded clients in retail, finance and tourism sectors to spend their web budgets this way. This is particularly noticeable at the cut-price end of these sectors, where busi­nesses want to match their offers to web customers with very specific criteria. For advertisers, the main attractions are price, measurability and the ability to reach niche audiences.

But as the popularity of search has risen, so has the price. According to Ms Jones, highly competitive sectors such as finance and travel have already flattened in the US, where some advertisers have pulled back because of doubts that they will make a return on their spend.

This may be a short-term phenomenon, and there is no shortage of industry advocates for search. Diageo uses it, even though it does not sell its products online. Nick Broomfield, digital marketing manager at Diageo Great Britain, says: “We buy the most appropriate key words to drive high-quality traffic to our brand sites.”

If users make it to websites for Diageo brands such as Baileys and Guinness, there will be lures such as competitions in an attempt to get consumers to leave their details, which will be used for further marketing.

George Karibian, chief executive of online office product retailer Euroffice, also believes that the price of gaining a new customer through a paid search cannot necessarily be measured by a single purchase.

“The problem for online businesses is that there is very little loyalty out there, which is why internet search-based advertising works well for low-cost suppliers. But you have also got to assess the lifetime value of customers with the aim of winning repeat business,” he says.

Can online branding campaigns catch up with search? Brands make some familiar complaints about the techni­cal and creative limitations of formats such as skyscrapers and pop-ups. A conscious attempt is being made to address these by initiatives such as technical changes. But the real stumbling block may be clients' attitudes.

Ciaran Deering, managing director of online advertising agency Tribal DDB, whose clients include Philips, travel group Tui and Volkswagen, says that branding campaigns in auto, high-tech and finance (sectors where consumers often research products online) are more established on the web.

“The fast-moving consumer goods sector still needs a lot more convincing,” says Mr Deering, who points to Coca-Cola’s recent move into music downloads as one exception.

Chris Ward, deputy director of MSN UK, adds: “The internet now makes up about 15 per cent of all media consumed – so the gap between the total amount of ad spend online and the amount of time consumers actually spend online is very broad. Our goal is to narrow that gap.”

He says the interactivity of the medium and new formats will assist its evolution as web publishers move to cleaner site designs with fewer ads and more, and better, creative hooks.