NEW YORK (Dow Jones News) -- Logic has it that if the Internet is as popular as it seems to be, then advertisers should be falling all over themselves to get a piece of the action. And in fact, it is that very theory that underlies the business model of a vast number of Web companies, whose future depends on attracting advertising dollars.
It shouldn't come as a surprise, then, that advertising dollars spent online are going up quickly. According to a recent study by PricewaterhouseCoopers and the Internet Advertising bureau, Internet advertising revenue increased from just under $300 million in 1996, to just over $900 million in 1997, to an estimated $2 billion last year -- and could double again this year.Meanwhile, though, the number of Web sites has also jumped -- giving advertisers that much more of a choice of where to spend their money. According to another recent study by AdKnowledge, a firm that tracks Internet advertising, the number of Web sites seeking ads has shot up nearly 40 percent in the last year, to more than 1,400.
If advertising dollars are doubling every year, but the number of sites competing for those dollars is only increasing by 40 percent, shouldn't there be more than enough money to go around?
Not necessarily. The reason: of those 1,400 Web sites, a small handful are far more popular than all the rest. And it's those sites that advertisers are targeting.
"The rich are getting richer and the big are getting bigger," said Rich LeFurgy, chairman of the Internet Advertising Bureau. "The second and third tier sites are not really able to command their market value on CPMs (cost per million advertising impressions), so they're accepting CPM deals worth less than their value."
According to the Internet Advertising Bureau, the 10 most popular Web sites account for close to three-quarters of all advertising dollars spent on the Web. Those 10 companies include firms like America Online Inc., Yahoo! Inc., and Microsoft Corp. And while these giants have been able to increase their CPMs, the rest of the industry has been dropping its rates. On average, they've fallen nearly 6 percent in the past year, to just over $35 -- and there are reports of some big advertisers trying to strike deals for as little as $5 per thousand impressions.
Does this mean all those second- and third-tier Web sites are doomed? Not necessarily, or at least not right away. They're fighting back by offering to strike so-called "hybrid" or "blended" deals with advertisers -- accepting lower upfront rates, in exchange for a piece of whatever business the advertiser ends up winning as a result of the ad. In other words, put up or shut up.
"People are getting more sophisticated," LeFurgy said. "Hybrid pricing was not something we foresaw two or three years ago."