Watch This Space

As advertisers struggle with online advertising, research organisations paint a picture of a confusing market. All indicate that online advertising is set to grow, but none can agree on how effective it is, nor what incentive there is to advertise online.

The online advertising market comprises less than 3 per cent of the total advertising spend in Australia, states the latest IDC report. However, this spend is on the increase. IDC forecasts the online advertising market in Australia will grow from $US56 million in 1999 to $US271 million by 2004.

Click-through rates are also on the rise. The click-through rates for leading ad banners have lifted 10 per cent across the globe, jumping from 0.46 in October to 0.51 in November, according to Nielsen//NetRatings' Global Internet Index. Nielsen said that this is an indication that banner ads are not at death's door, as has been claimed.

"The average click rate for top banners increased 9.7 per cent during the period reviewed - a significant boost by any measure," said David Day, director of analytics, ACNielsen "This indicates that internet users are clicking through on banners when the offer is right," he said.

IDC is quick to point out that the average click-through rates on online advertising in Australia is still well below 1 per cent.

Researchers can't agree on the future of this market. Even forecasts for the industry's online advertising spend differ. Last month Jupiter Media Metrix released a report forecasting that the local online advertising industry would generate $70 million this year and be worth 0.5 per cent of all advertising spending. Since then, Guy Cranswick, an analyst at Jupiter Research, said that this figure was overestimated and is probably "around $60 million."

In the same week that Jupiter's report was released, Goldman Sachs' report, Technology:Internet, made a slightly more optimistic prediction that the market would generate $92 million this year, 1.1 per cent of the total market. Goldman Sachs forecast that this would grow to 6.8 per cent of total advertising by 2005.

Cranswick said that, compared to the amount of ads in overseas sites, most Australian sites are "empty". "One of the paradoxes of Australia is that we have 40 per cent of people connected online and yet the size of our online advertising market is the same proportionately as Brazil, where only 2 per cent of people are online," said Cranswick.

"There isn't another Western ad market as undeveloped and immature as ours."

Conflicting views on the future of the online advertising market is perhaps an indication of uncertainty in the dot-com market. Goldman Sachs stated that the challenges to the growth of the online advertising market is primarily attributable to the fallout from the dot-com funding crisis and a lack of incentives for traditional agencies to promote web ads. Agencies favour television, print or radio because they receive higher commissions and fees.

IDC said that the dot-com advertising spending frenzy was possibly the biggest incentive for traditional advertisers. More and more traditional advertising firms have entered the online arena, wanting their piece of the action.

"The advertising industry is starting to find that online advertising does not mean the demise of the traditional advertising market; in fact, it is a complementary channel," said Brooke Galloway, senior analyst, internet and e-commerce, who authored the IDC report.

However, Cranswick's estimation illustrates that the advertising industry has a long way to go. "In per capita terms the online market is worth $US5 per head," said Cranswick. "In scale terms with other markets the US is worth $US44 per head and Western Europe is worth $US15 per head. Yet we have the second-highest internet penetration per capita in the world."

Despite Nielsen's claim that talk of the demise of online banner ads is premature and the recent increase in click-through rates, it is questionable how online advertising can remain effective and what the incentives are to advertise online. What Cranswick described as "empty", Galloway described as "flooded".

"Trying to attract a user's attention in an online world that is flooded with banners and buttons is becoming near impossible. It would be foolish for a company to rely solely on the internet to meet all their advertising requirements," said Galloway.

Online advertising needs to be supported by offline advertising channels, according to IDC. It is becoming increasingly popular for advertisers to offer the full spectrum of advertising services, both on and offline, to build brand awareness and generate traffic.

According to Nielsen's index, the primary driver of the rise in click-through rates is the European online market. "Australians are not clicking through ads anywhere near as much as the Europeans are, " said Lloyd Parata, director, sales & marketing Asia-Pacific, Nielsen//NetRatings.

And irrespective of its forecasts about the future growth of the online advertising industry, IDC warns that the traditional online business model of relying on advertising as a primary source of revenue is a recipe for failure. "While certain offline industries, such as print and television, have been able to survive primarily on advertising revenues, picking up these models and applying them to the web won't work," Galloway said.

"Online advertising revenue will prove to be a viable alternate source of revenue but should not be relied on as a primary source of revenue. This has been proven many times over, most recently by Free Net who shut up shop a few weeks ago because they found it impossible to survive off advertising revenues alone," she said.

Research organisations seem unable to agree on the future of online advertising in Australia. So what does the future hold? Stay tuned.

Courtesy of The Industry Standard

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