Online Advertising Opens Up

By Jay Lyman

This article appeared in the June 2005 issue of Web Host Industry Review magazine. Click here to sign up for free.

June 5, 2005 — (WEB HOST INDUSTRY REVIEW) — Just as Web hosts seemed to be maxed out selling their bread and butter, Web-centric services, along came a resurgence in online advertising. This new life was driven mostly by search engines ? and a wider array of businesses looking beyond just getting on the Web. These businesses want to get noticed on the Web, and are willing to pay for it. In response, Web hosts have partnered, merged and produced their own divisions dedicated to pay-per-click advertising, search engine marketing and optimization, analytics, and bringing it all to hosting customers.

While hosts are working to broaden their services and revenue streams, industry observers say those customers are putting more priority on advertising and the effective usage of their chunk of the Web.

Yankee Group (yankeegroup.com) senior analyst Sanjeev Aggarwal says that when SMB hosting customers were recently asked what criteria they use to choose a Web host, price came in at the top.

“Guess what came second?” he asks. “Bundling of tools and services to support online advertising and marketing.”

While most firms view some form of online advertising or marketing as obligatory, many are bewildered by the variety of hosts, services, options, and technology tools.

“In a lot of cases, they don’t know how to use it effectively and there are Web hosts who are helping these users use it more efficiently, and gaining from it,” he says, offering Affinity Internet (affinity.com) and WebSideStory (websidestory.com) as examples. “There’s a lot of interest in this area.”

According to Aggarwal, Urchin Software ? a recent acquisition of Google ? answered the need for easier-to-use, easier-to-understand marketing analytics tools that allow users to understand what is working and what is not.

Urchin Software and its business are also a reflection of how today’s online advertising relates more to e-commerce products that people are actually seeking and selling online, as opposed to, say, pet supplies.

“I think the area of analytics is key to all of this,” Aggarwal says. “As companies look at areas of acquisition, one of the key areas is analytics, rather than simple tools, like a shopping cart. Analytics ? having a history and knowing where a user has been ? can lead to more revenue-generating results for a company.”

Aggarwal says Google’s (google.com) acquisition of

Urchin and the integration of the analytics tools into Google’s AdWords ? which brought a slashing in half of the price for Urchin in May ? has actually brought the analytics company and others like it closer to Web hosts. Many of those hosts license the software and make it available as a bundled offering with other online marketing and optimization services.Despite the priority on pay-per-click and search engine marketing among Web hosting customers, Aggarwal said there is still more growth likely, as the interest level remains higher than the actual investment.

“If you look at where things are going, even though people aren’t using a lot of online marketing, there is an increased amount of interest,” he said. “The more these people get educated ? not only on the tools but how to use the tools effectively ? you’ll see more. The broader SMB market just needs help. They will pay for [tools and services]. If it drives revenue, it’s no issue to pay for it.”

WebStream (webstream.net) president and CEO Kerry Brewer compares today’s online advertising resurgence to the original rush for companies to establish themselves online in the late 1990s. Now in the year 2005, he says, companies are more interested in differentiating themselves online and directing the right consumers to their sites.

“Now it’s a fight to get recognized,” he says. “It’s becoming more important. Lately, we’ve been spending a lot of time hearing about marketing. I would say today, a lot of calls and requests are like that. They need help.”

Brewer says online advertising and search engine marketing and optimization are a natural progression for his nine-year-old Web hosting business.

“A lot of people truly are willing to pay for clicks as opposed to a few years ago,” he says, referring to a Forrester Research five-year forecast that puts the online marketing and advertising market at $26 billion by 2010, when nearly half of marketers plan to decrease spending on traditional channels such as magazines and direct mail while bumping up their Internet advertising budgets. In a May 2005 report, Forrester indicated online advertising ? display ads, email, search, and classified ads ? will represent about 8 percent of all ad spending in 2010, up from today’s figure of about 3 percent.

Brewer credits the search engine success of Google’s AdWords and Yahoo!’s Overture (searchmarketing.yahoo.com) with starting the surge. He says the new online advertising life represents a more effective application of advertising dollars.

“It makes it easy to target more precisely and customers can better manage their advertising dollars,” he said. “We’ve got companies pulling money from their conventional budgets ? TV, print, etcetera ? to the Web.”

As Brewer tells it, the swell of interest around search engine optimization, search engine marketing and pay-per-click advertising arrived at a time when the Web hosting industry was searching for the next set of services to bring to its customers.

“At some point, if you’re set with hosting and your site, there becomes a limit on the services we can sell down the pipe,” he said.  “To be able to fill a based-in-need service like this ? it’s obviously a new revenue stream for us and it’s coming in from outside Web-centric services.”

Brewer says there are limitations to what can be done with search engine optimization, but differentiates his company’s services from an increasing array of companies rushing to meet the demand that Aggarwal describes.

“The landscape becomes cluttered,” Brewer says. “It becomes unclear who can do what and there are questions of fraud and inability to perform. This is typical. With search engine marketing and online marketing, there are all kinds of little firms popping up. It doesn’t take much money to become a search engine optimizer. We’ve seen a lot of clutter reminiscent of 10 years ago when the hosting business was like that.”

Brewer says companies guaranteeing top placement on Google or other search engine results are doing something his company will not. Instead, he points to the quantifiable and understandable analysis that typically accompanies today’s online advertising. In the case of search engine optimization, Brewer says it is now relatively easy to quantify results and show customers how search engines see their sites.

But today’s analytics go beyond the search engine view of the Web and client sites, giving customers almost instantaneous input on the effectiveness of their advertising tools and efforts.

“The reporting is very important and the ability to show statistics and results is paramount,” Brewer says.

Customers who have felt bewildered or baffled by typical marketing math and mysticism are often pleasantly surprised by today’s comprehensible online advertising data.

“It’s very important for them to see it clearly,” says Brewer. “To be able to break it down for them on a weekly basis ? that’s 90 percent of the battle.”

Forrester (forrester.com) analyst Charlene Li says her firm’s recent study of online advertising gauged mostly large companies, which plan to spend more on Internet marketing efforts. As for Web hosts, Li said most organizations in the hosting industry are serving the smaller to medium-sized business market, which is also the most likely to jump on the Internet bandwagon, driven to it in some cases by limited marketing budgets.

“[Web hosting customers] are mostly small businesses,” she says. “They don’t buy traditional advertising, so their only real way of advertising is through direct mail or online. It does make a lot of sense for Web hosting companies to offer these kinds of [advertising and marketing] services.”

Li says online advertising has also become more appealing with companies such as Yahoo! and MSN making it easy for customers to purchase software or service suites that include an emphasis on Internet marketing. However, it is the utility and simplicity of Web search, and changes among consumers, she said, that has driven online advertising’s strength.

“It’s the whole idea behind search,” she said. “You know what I’m looking for and you know how effective it is.”

In a survey of 99 national marketing organizations, and interviews with a subset of those, Forrester highlighted the growing opportunities around Internet marketing and advertising, pointing out a variety of forces ? in consumers, in advertising and Internet maturity ? converging to create a multi billion-dollar online ad blitz that draws in a range of technology companies, including Web hosts.

In the May report on its survey and interview results, Forrester found that while consumers are spending more high-speed time online, they are also gaining more trust in the Internet, and advertisers are following. As newspaper circulation drops and digital video recorders skip TV spots, the Internet is being recognized as among the most efficient media for advertising spending. One Forrester respondent also stressed there is still plenty of room for more Internet advertising, which today can be tied directly to sales.

“We don’t look at online spending as a percent of our ad budget because most of it is being spent to drive sales,” said a representative of one travel provider. “We haven’t come close to saturating all of the online channels that we believe will pay off for us.”

Online marketers say they believe the effectiveness of online advertising will continue to improve over the next three years.

“In contrast, many of the marketers we surveyed believe that traditional channels ? television, radio, newspapers and yellow pages ? will become less effective over time,” wrote Forrester analysts Charlene Li and Shar VanBoskirk.

They say online advertising budgets will also expand as marketers and others ? perhaps Web hosts ? look to catch up to changing consumer habits, which are becoming more concentrated on the Internet.

Forrester says consumers ? who spend 34 percent of their media time and 7 percent of their shopping dollars online ? are becoming better Internet users, making use of standard search as well as other research and comparison sites and software. At the same time, consumers’ tolerance for irrelevant ads that target them indiscriminately ? as opposed to targeted, search-result-oriented online advertising messages ? is also diminishing.

“Almost all consumers say that they want to block unwanted ads ? online and offline ? primarily because advertising is too ubiquitous, too interruptive, and not relevant,” said the report. “The Internet’s ability to use data and context to provide more relevant advertising will gradually distinguish this medium from anonymous, traditional channels.”

Though there is a recognition that advertisers are willing to pay for online marketing they deem effective, they are going to have to pay more, says Forrester. It says several of the large portals, such as AOL, MSN and Yahoo!, acknowledged that almost half of their growth in 2005 will come from pricing increases.

However, in online advertising areas like paid search, for example, increase in cost will come with better targeting, Forrester says.

“In our survey, marketers said that targeting based on past behavior or past searches would have the largest impact on their search spending,” said the report. “Forrester believes the average cost per click will increase significantly in 2006 due to these new targeting tools. Sites like Yahoo! and MSN that can leverage their knowledge of users across their networks will see more of the growth than players like Google.”

Nevertheless, the search engine superstar ? which some argue breathed life back into online advertising ? will continue to lead in some areas and will look to leverage its deep publisher support for advertiser loyalty, Forrester said.

“With Google’s announcement that it would enter the display advertising space with site targeting on AdSense,” said the report, “portals like AOL, MSN, and Yahoo! as well as leading content sites like nytimes.com will face potential advertiser migration to Google’s extensive publisher network.”

Forrester also said search engine marketing firms will gain both respect and buyer interest as search grows to 44 percent of online ad spending by 2010. And consolidation is in the air once again, as companies seek to put together the whole package for advertisers.

“Top agencies like Performics and iProspect have been snatched up already by DoubleClick and ISOBAR, respectively,” said the report. “Did-it, icrossing, and Fathom Online are also prime targets for agencies like Agency.com, Digitas, and Ogilvy Interactive.”

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