Advertising Webonomics 101 a not someday, today advertising on the Web. You just have to forget

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from WIRED magazine, February 1996, pp.74-82.

Advertising Webonomics 101


Not someday,

today - advertising on the Web. You just have to forget everything.

By Evan I. Schwartz

New sites on the World Wide Web are cropping up at the rate of one per minute. As it expands at

this astounding rate, the Web’s colorful entanglement of words, pictures, sound, and motion is briskly becoming more than just a new medium. It’s more

that mirrors the real world in unique properties in others.

I And if you hang out there long enough, you will slowly discover that nothing less than an

• entirely new publishing

and advertising economy

I is taking shape in this man-made, information-based terrain. Call it Webonomics.

• The principles of Webonomics derive from the millions of interactions and trans­actions that take place on the Web every hour. And to comprehend exactly how the world’s first large-scale, bit-based economy is going

a ~ to play out, you have to

INFKASTRUCWRE first understand the

motivations behind the four main groups settling the digital landscape:

• The consumers - an estimated 20 million people

worldwide, are surfing the Web in search of surpris­es, cheap thrills, knowledge, and entertainment, plus information on products and services they hope will enhance their lives.

• The content creators - dozens, soon to be hundred’ of publishing companies, television networks, movie studios, and hybrid media outlets are colonizing the Web by creating perpetually updated pages meant to inform and amuse those who visit.

• The marketers - hundreds, soon to be thousands, C companies are promoting products ranging from for( and beverages to cars and trucks to information and

Web makes economic sense. you ever learned about the business

The infrastructure companies - makers of hardware and software are selling Web server computers and Web browser software. Dozens of Internet access providers offer gateways to the Web. And advertising agencies along with thousands of consultants have set up practices to create custom Web sites for clients.

This last group is already making money hand over fist. But that won’t continue if the others decide that the Web isn’t living up to its hype, which could cause newly developing business models to collapse like a house of cards. Averting such an apocalypse requires a keen understanding of Webonomics.

One of the first content creators to learn the princi­ples of Webonomics the hard way was USA Today. In April 1995, the national newspaper published by Gannett Co. Inc. announced it would begin providing software for people to access its Web site, charging US$12.95 per month for three hours of access to its online newspaper; $2.50 for every hour beyond that. But after four months, it managed to amass only about 1,000 subscribers, a disastrous showing for a news­paper with a daily print circulation topping 2 million. Lorraine Cichowski, vice president and general man­ager of the USA Today Information Network, says the paper’s first mistake was the “unnecessary” move into the Internet access business, a commodity mar­ket well served by dozens of other companies. The second mistake was charging a subscription fee. In August 1995, USA Today began phasing out its software business and made its Web site free.

That’s the first principle of Webonomics: Con­sumers will rarely pay a subscription fee for access to a Web site. “In an online world flooded with free information, ‘advertisers will treat information charges as damage, and route around them;’ says Josh Bernofi, a senior analyst with Forrester Research Inc. In this sense, the Web is like cable TV: people will pay for delivery of the medium itself, but will pay extra for only one or two premium channels, if any. Which begs the question: How will content providers make their money? USA Today, for instance, must support more than 75 employees dedicated to running its Web site, plus a network of more than 225 freelance people.

Cichowski says, Gannett is in this to make a profit - at least eventually. Publishers are hoping that Web users

one day will prove willing to cough up “micropayments” to buy stories by the piece: a dime for an article about yester­day’s Giants game, for instance. But the concept is unproven, and systems to sup­port micropayments are in the infant stage. So, for now, says Adam Schoenfeld, a senior analyst with Jupiter Communica­tions in New York, publishers are turning to three sources for revenue - “advertis­ing, advertising, advertising.” The most popular Web sites, such as

HotWired, Time Warner’s Pathfinder, ESPNET SportsZone, and Playboys site, have all been charging between $30,000 and $100,000 for three-month placement of a postage-stamp- or business-card-sized button on their digital pages. These ads are also known as “links?’ Click on one and your eyes will be transported, or linked, to a promotional Web site running on some other computer. After interacting with that advertisement, you presumably will link right back to where you were. The people running these popular con­tent sites will tell you that demand for advertising links has been strong. Bruce Judson, general manager of Time Inc. New Media, reports that at least 35 major marketers - including AT&T, MCI, Intel, Chrysler; Ford, Fidelity, and Kodak -booked for at least one quarter of 1995.
HotWired, the Web site started by the parent company of this magazine, sold ad placements to nearly 40 companies by the end of 1995, says Andrew Anker, HotWired’s president and CEO. Demand for advertising has been so strong that HotWired was able to raise $7 million From a group of international investors in return for a 15 percent equity stake in the privately held Web venture.

But when it comes to actual revenue from advertising, there might be less to

the Web than meets the eye. Talk to mar­keters, and they will tell you a little secret they rarely, if ever; pay the prices publish on the rate cards. “There are rates, but nobody pays the official figure,” says Mar Lou Floyd, general manager for AT&T’s promotional Web site. “The rates can be terribly unrealistic, so you go in and do heavy negotiating?’ Some marketers say they won’t fork over any cash at all. Rich Everett, manager of interactive communications for Chrysler Corporation, usually demands a few freebies before he commits to paying. “If you want our business, you’re going to have to give us a few free rides on the bus first,” he says.

A few content sites admit to giving out Web links. Eileen Kent, vice president of Playboys New Media division, says that Playboys ad sales staff includes Web link as part of a package for the print maga­zine 5 advertisers. “Anyone who tells you they are doing significant business on the Web is lying;’ Kent declares. Suffice it to say that many content sites with lots of ads are not generating nearly as much revenue as they would lead you to believe

That brings us to the second principle of Webonomics: The old models of selling advertising do not apply. Says Chrysler’s Everett, “On the Web, everything we knew about advertising is out the window?’ AT&T’s Floyd agrees: “You must throw out all traditional thinking and start from scratch?’ Traditionally, advertising price

based on how many people might see the ad. This ratio, the cost per thousand (con­fusingly shortened to CPM), is ingrained into the consciousness of every advertis­ing executive. The television industry use’ ratings to set ad prices, and the publishing industry uses audited circulation figures. In this model, a network television show will typically have a CPM of about $5. A newspaper or magazine will be priced at about $40 per thousand readers, since they provide a smaller but more targeted

audience. So far; according to Forrester Research, popular Web sites are officially Charging about $75, even though few advertisers are paying that price. But a new model is beginning to emerge. And it’s much more intricate than anyone ever imagined. To understand it, you must firs consider the objectives and experiences 0:

the marketers themselves. Every marketer has specific goals for a Web site, but there are two common themes: to enhance the brand image of the company, and to provide a targeted set of consumers with plenty of product information in the hope of landing sales and attracting loyal cus­tomers.

Volvo Cars of North America Inc. had these objectives in mind back in the fall of 1994. That’s when the US arm of the Swedish automaker became the first car company to establish a Web presence, and one of the first advertisers on Web pub­lishing sites. Specifically, Volvo wanted to give people looking for a luxury car a new information tool that would make them consider a Volvo more seriously, says Bob Austin, Volvo’s director of marketing communications. He notes that only about 6 percent of the adult population has the money and inclination to buy a $30,000 car. He saw those people as having a high overlap with the early Web surfers. “We know that our potential buyers are well-off and tend to be early adopters - people who enjoy technology;’ Austin says. So the company spent about $100,000 developing and advertising what started out as essen­tially just an electronic brochure.

While the site failed to secure many, if any, sales, other unexpected problems arose. The only truly interactive part of the site was the ability to send e-mail to Volvo. “People would occasionally write things like: ‘Nice Web site, but the sunroof on my 850 leaks;” Austin says. Many state lemon laws require responses to such complaints within a specified time, other­wise the manufacturer has to buy back the can Since Volvo failed to staff the site with people qualified to respond to such com­plaints, it became a tool not to increase sales but to potentially damage them. As a result, the e-mail feature had to be shut down within a few weeks.

That experience in hand, Volvo decided to scale back its Web advertising and sim­ply promote the site in TV and print ads while continuing to provide information online too expensive to disseminate through traditional media. Austin says he just wasn’t getting value for money spent, especially since sites such as HotWired were unable to provide hard numbers on the demographics. “I’m not comfortable throwing more money at advertising the site right now;’ he says. ‘We’re not here to sell Web sites. Web sites should be here to sell cars?’

That leads to the third principle of Webonomics: Marketers are not on the Web for exposure, but results. Picture the process of prospecting for customers as a giant funnel. Traditional mass-market advertising on TV and radio or in national newspapers and magazines works at the wide mouth of the funnel. No ad on a Web site will ever provide the mass exposure of those media. But the Web can work its wonders at the funnel’s bottom, or spout. “The most important thing the Web can deliver is a fully qualified lead or cus­tomer;” says Emily Green, a Forrester senior analyst who studies Web trends. Everett puts it this way: there are four steps to landing a customer - tell, sell, link, and think. A traditional ad, he says, will “tell” you that a product exists and “sell” you on its benefits. The Web, how­ever; must pick up where traditional ads leave oft If Chrysler does its job right on the Web, he says, it will “link” qualified and interested buyers into a virtual show­room and give them enough information to ‘think” about whether they are actually going to purchase the car.

Marketers commonly pay big money for those qualified and interested consumers. That’s what direct mailing lists are all about. Of course, gathering up the right customers and funneling them to the right advertisers is a difficult process. But it can be done very efficiently on the Web. Consider the Web site of Individual Inc., the Burlington, Massachusetts, company that provides an online news service called NewsPage. Visitors fill out an elec­tronic form in which they choose among 850 business news topics - from genetic

research to network security to group­ware. After receiving the profile of a cer­tain user’s interests, Individual’s software scans a constant stream of 15,000 incom­ing stories from 600 daily and weekly publications, and provides a customized news digest on demand to each user. During the first two months of business, its Web site attracted 50,000 users who actually paid $2.95 to $6.95 per month for the service. Subscription fees make up one-third of the site’s revenue, the remainder coming from advertising.

Since the company knows the specific interests of its customers, advertisers can target the exact consumers they want. Silicon Graphics Inc., for instance, sells Web server computers, so it has sponsored one of the news sections about the Web. IBM’s Lotus division has sponsored the news section on groupware. And 3Com Corp., which sells network hardware and software, has sponsored the section on local area networks. A consumer with those specific interests will see only relat­ed ads. This way, each advertiser gets to appeal to the prospects it values most.

Individual has had a hard time setting a price on those ad placements. For every advertiser; value is different. So, it simply auctions the available placements to the highest bidden In other words, each advertiser pays what it thinks the ad is worth. (This scheme, however; will be offered along with more traditional price­

mg in early 1996 at the request of several advertisers.) In its first three months selling Web links, says co-founder John Zahuer; Individual took in around $250,000.

Another innovative way of charging for advertisements comes from USA Today. This is how it works: Gatorade, for instance, chooses to place its logo within the colorful flag at the top of the paper’s online sports section. Instead of trying to charge Gatorade a random fee -say $45,000 for a three-month placement

USA Today estimates how many times an advertiser’s image or logo is uploaded charging $30 per 1,000 people who will do so over a minimum two-month period USA Today also charges $20 for every 1,000 customers it estimates will click on the logo and link to the promotional site. This way, advertisers are not paying to reach all 70,000 to 80,000 people USA Today estimates it attracts every day, rather only the ones who are likely to see and act upon its ads.

Ultimately, the ideal model for selling advertising would arrive if USA Today and others took the next logical step:

not charging anything upfront for an ad placement, and only charging for the real, measurable results. This method naturally holds great appeal to advertis­ers, because it means that advertisers pay a low amount (or nothing at all) if the content provider fails to deliver con­sumers, and a higher amount if the ad succeeds. This way, both parties share the risks and rewards. The ads become like salesmen working on commission.

“Most marketers will go for that choice rather than pay $30,000 upfront,” says Everett. This new, result-oriented way of advertising is made possible by a slew of new audience measurement technologies for the Web. Start-ups like WebTrack, Digital Planet’s NetCount, and Internet Profiles - or I/PRO - are getting into the business of verifying and analyzing the

numbers kept by all Web server comput­ers. When a user visits a Web site, soft­ware running on the server at that site keeps a log of how many file-lookups - or hits - the user invokes. For instance, a Web page with text and four graphical elements might translate into five hits. Those who run the most popular Web site often brag about their hit count. The Web servers run by Playboy, for instance, were logging about 3.2 million hits per day by December. ESPNET SportsZone, a site run

by Allen’s Seattle-based Starwave reached 1 million hits per day last 2 million by mid-August, more than lion by Labor Day weekend, and

tillion by Thanksgiving, says Star-CEO Mike Slade.

Along with many others, I/PRO has n auditing those server log files, ‘ring the information, and translating it-rate data into reports that are supposed to provide an objective measure of many individuals visited each site. B, based in San Francisco, already more than 75 subscribers to its Web ;measurement service, including advertisers as Chrysler and media companies’ USA Today and Time Warner. Last year; I/PRO received a big boost when A. C. Nielsen Company bought a stake. Nielsen’s help, I/PRO is aggressively

angling to do for the Web what Nielsen has done for television - namely, measure how many potential people might see a certain advertisement. But unlike TV,

the potential exists on the Web to provide deadly accurate numbers.

Still, there’s something far more impor­tant to marketers than even measurement data. These are, of course, the demograph­ics (such as income level) and the psycho­graphics (such as buying patterns) of each consumer To date, few content providers have been able to tell advertisers much, if anything, about their audience. “We don’t know who these people are;’ laments Everett. Browsing the Web is pretty much an anonymous activity. The New Yorker cartoon about how nobody knows you’re a dog on the Internet still holds true. That is, unless you tell others on the Net that

you are a dog, along with what Zip code your doghouse is in, what kind of leash you wear; and what flavor Milk-Bone you prefer and why. When you disclose this, you become a very valuable dog indeed. But there has to be a damn good reason to give out this information.

This brings us to the fourth principle of Webonomics: Customers must be rewarded when they disclose information about themselves. Many consumers are beyond worrying about data spies invad­ing their privacy and are willing to make a trade-off - if the deal is a good one. “If someone tells me who they are and what car they drive, they should get a cookie;’ says Everett. That reward can be in the form of a $100 or $500 rebate on a new car or; say, the promise of a free CD player. To a marketer; of course, informa­tion about your usage of a product makes all the difference in the world. “If you tell me that your minivan is 5 years old;’ says Everett, “I want to get an attractive lease rate to you immediately?’

Getting people to enter this kind of personal data in the computer is a big challenge - for both marketers and content creators. “It’s a big problem;’ say loyd. “You need to require people to ‘register for your site to know who they are. But by requiring registration, you may lose them altogether?’

That’s exactly what began to happen a HotWired. In an attempt to tell advertisers something about its audience, HotWired had required a registration process for those wishing to log on to its site. You fill a your name and address, e-mail address, answer a few questions, and choose a name and password. Within hours, the ite e-mails you a confirmation. Then, very time you go to the site, you must enter your password. But as more and more content sites cropped up on the Web (most not requiring registration), HotWired found that many Web surfers were blowing by its site altogether In ‘response, last August, HotWired made ‘registration an optional process.

But in keeping with the principle of

rewarding consumers for disclosing

information, HotWired has made sure the regi

5 tration process isn’t without its consumer

s benefits, says Anker. The software offers

registered members customized views of

HotWired content by remembering prefe:

ences users cited during enrollment. In

5, addition, it recalls when registered users

,r last visited the site and places all new

content since that time under a special

“What’s New” section. Anker says the not

yet-profitable HotWired will continue to

move toward letting registered users cre

ate their own interactive experience.

Another way of rewarding customers

who disclose information is by providing

a new form of service-based advertising.

Imagine a phone company that lets user

tap into its customer service database

over the Web. Customers could not only maintain an updated list of their most frequently called numbers but also tell the system what time of day and week they

usually do most of their calling. Such a Web site could make it more convenient -for users to create their own customized calling plan - at a favorable price. “To present your needs and have AT&T come back with a plan for you - it doesn’t get any more perfect than that;’ says Floyd. Very few promotional Web sites, however; are performing these one-to-one market­ing techniques.

More common is rewarding customers by providing entertaining activities in exchange for information. A simple exam­ple is the Stolichnaya Vodka Web site, where visitors can step behind a fully stocked virtual bar. First, you choose

ingredients from screen menus and mix your own drink - all the while learning about Stoli’s many flavors. Then you type in a name for your concoction and submit your recipe. Your creation instantly appears with your name on a list along­side other visitors’ creations. Finally, you can browse the list and vote for your favorite. When I visited, the leading vote-getter was a concoction called “Bartender; I’ll Have What the Guy on the Floor is Having?’ Not only is this a fun way for consumers to spend time thinking about Stoli’s products - well, I found it fun - it’s a good way for Stoli to learn the often unpredictable preferences of consumers.

Ultimately, such a site can turn into “an online focus group;’ says Eric Marcus, an Internet strategy advisor with CSC Index’s Vanguard research program. The idea, Marcus says, is to engage your cus­tomers in an interesting, ongoing dialog about how you can improve your products and services. Rewarding customers to take part is a small price to pay for obtaining that edge, he says. What’s more, doing it on the Web is much cheaper than conven­ing a live group.

Which leads to the fifth and final princi­ple of Webonomics: It’s not the quantity of people you attract to your site that counts most but the quality of their experience there. A Web site that attracts just a few thousand loyal consumers will ultimately be more valuable than one in which a million new people visit each month but never return. In this sense, all the Nielsen-like measurement tools deployed become moot. Who wants the Web to become like television, in which the num­ber of eyeballs you attract becomes the all-important measure of success? “If it becomes an eyeballs medium, it fails;’ says Green. The Web should not become yet another mass medium, but rather the first truly interactive one. In the words of Everett, it should be a place where you go to “link and think” - the place you go when you want to use your brain... m
Evan L Schwartz (evan@cis.compuserve .com), is a Boston-based contributing writer for Wired. He wrote “Wanna Bet?” in Wired 3.10.
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