The University of Texas at Austin- What Starts Here Changes the World
Services Navigation

Click and Sell: Marketers shift ad dollars and take advantage of Internet's ability to target potential customers

In late April, less than a year after its initial public offering, Google Inc. had a market capitalization of $60 billion—that’s eight times the combined value of The New York Times Co. and Dow Jones & Company, Inc. While Google’s status as the Internet’s dominant search engine is unquestionable, recent deals like the acquisition of AskJeeves by InterActive Corp for $1.9 billion and the $1.1 billion purchase of online advertising firm DoubleClick by a private equity firm point to one clear conclusion:

Illustration of online marketers targeting potential Internet customers

The Internet frenzy is back. And this time, it’s all about advertising.

According to the Interactive Advertising Bureau, domestic spending on Internet ads was a record $2.7 billion in the fourth quarter of 2004, a 24 percent increase over the year-earlier period. For all of 2004, advertising on the Web increased by nearly one third, to some $9.6 billion. In 2005, American Technology Research expects online advertising to reach $12 billion. These figures underline the structural shift underway in the advertising and marketing business—a change that is forcing companies of all shapes and sizes to re-think how and where they try to reach their target customers.

In many respects, the shift to online advertising makes sense. Seen from an Internet-era perspective, traditional ad campaigns are hopelessly inefficient. If you own a hotel in Budapest, for example, you can choose to buy ad space in a travel magazine, assuming that its readers are disproportionately interested in traveling to Hungary. But if you place an ad through a search engine like Google or Yahoo!, you no longer need to make those assumptions about preferences. You can advertise to a self-selected group of Budapest enthusiasts.

In other words, the key difference between the old advertising model and the Google model is this: advertising on search engines allows companies to deliver context-based ads to people who have already expressed an interest (by typing in a specific keyword) in a particular topic. That’s far more effective than broadcasting a product pitch to every consumer regardless of his or her interest in that product.

Taming the chaos

Individuals who get on the Internet are, in general, seeking information. Unlike people who turn on the radio while cleaning the house or scan the newspaper while eating breakfast, citizens who go to Google or Yahoo! want something. They are usually after specific information—scores, schedules or stock prices. The challenge is to extract that snippet of data from the chaotic jumble of thousands of servers all over the world, which hold more than eight billion Web pages.

Vijay Mahajan
Dr. Vijay Mahajan

By taming the chaos of the Internet, search engines have captured the attention of a person who has shown a preference for something specific—and that specificity has value. In the case of Budapest, it means hotel owners, tour operators, rental car companies and other companies that have business interests in Budapest may be able to sell something to the person who entered that search term.

Context-based advertising on search engines allows companies of all sizes to reach “niche markets that would otherwise be unapproachable,” says Vijay Mahajan, marketing professor at the McCombs School of Business. Mahajan is the co-author of the 2003 book “Convergence Marketing: Strategies for Reaching the New Hybrid Customer,which has been translated into six languages. It was also named one of the best business books of 2003. By going to Google or Yahoo!, sellers can “take a scattered environment and consolidate it in a virtual marketplace,” Mahajan says. “Marketers can reach the targeted market much more cheaply than would otherwise be possible.”

Mahajan and another McCombs professor, Andrew Whinston, both believe the shift of advertising dollars away from traditional media and toward online outlets like Google and Yahoo! will accelerate in the coming years. By allowing even very small companies to effectively reach their customers at far lower prices than was possible under the old model, advertising on the Internet acts as a disruptive technology—a radical departure from the old model that demands the attention of marketing and advertising practitioners across the business spectrum.

Google and Yahoo! have turned one of humankind's most basic urges--the search for knowledge--into a platform for marketing almost anything.In other words, Google and Yahoo! have turned one of humankind’s most basic urges—the search for knowledge—into a platform for marketing almost anything.Thus, a search for “beekeeping” on Google yields a number of search results; right next to those results, at the very top of the page, is an ad for Betterbee, a Greenwich, New York-based supplier of beekeeping supplies. By advertising on Google, Betterbee can reach a small universe of potential customers (there are about 200,000 beekeepers in the U.S.) and do so at minimal cost.

“It’s an effective way to get our name in front of people right away,” says Shane Gebauer, an assistant manager at Betterbee. Gebauer says Betterbee has been advertising on Google since February of 2004 and has seen a marked increase in Web traffic since then.

Peeking behind the curtain

Whinston’s latest research has focused on how Google and Yahoo! price the advertisements they sell to companies like Betterbee. Both companies use an auction system, which allows advertisers to decide how they want to be ranked when a given keyword is entered.

“More and more small businesses are competing for those keywords,” says Whinston. “You can be listed first, second, third or fourth, depending on what you believe is your best shot at getting customers.”

Whinston, a professor in the Management Science and Information Systems Department who also studies the video game market and other online arenas, foresees scenarios in which books will be published on the Web for free—if readers agree beforehand to view ads imbedded in the book’s text. He also believes the entire advertising industry will have to reorient its business models toward Google’s model. That could mean that big ad agencies such as McCann Erickson, J. Walter Thompson, BBDO and others will have to cede some of their turf (and potentially, some of their profits) to Google. 

Andrew Whinston
Dr. Andrew Whinston

Like Mahajan, Whinston is an expert in the emerging online marketing business. He directs the Center for Research in Electronic Commerce at McCombs and is also a professor in the departments of Economics and Computer Sciences. Whinston, who has worked on computer-related issues for more than four decades and has recently studied how Google and Yahoo! sell their ad space, says the power of Google was demonstrated during a recent trip to Hawaii. While there, Whinston met a man who, he recalls, “did nothing but help local boat charter companies figure out how to get their ads in the right spots on Google.” The power of context-based online ads will make Google “a dominating platform” in the coming years, he says.

Looking at the numbers

Advertising numbers back up Whinston’s contention. Online ad spending already exceeds outdoor billboard advertising, and this year, industry analysts expect Web-based ad sales to exceed the amount companies spend on both print magazine ads and Yellow Pages ads.

While online ads are still a relatively small portion of the $263 billion-per-year American advertising market, by 2010, according to Sanford C. Bernstein & Co., advertisers will be spending more than $22.5 billion per year on Internet advertising—an amount that will exceed spending on network TV advertising. By the end of the decade, only cable TV advertising will be bigger than online advertising. And in a world where many consumers are using devices like TiVo to avoid unwanted advertising, cable is facing threats, too.

Obviously, this isn’t the Internet of 1999 and 2000. One-month IPO (initial public offering) wonders like and have given way to enterprises with sustainable business models. Meanwhile, consumers around the world have become much more comfortable with the entire online universe. And all of them need help finding stuff—a fact that has made the big search engines even more important. Last year, Yahoo! saw its total revenues more than double, to $3.5 billion. The segment of its business that Yahoo! calls “marketing services” nearly tripled, going from $1.2 billion in 2003 to just over $3 billion in 2004.

A Brief History of Internet Advertising
1994 Mosaic, the first widely used World Wide Web browser, was developed for Mac, Microsoft-X and Microsoft Windows platforms by the National Center for Supercomputer Applications. Spyglass Inc. acquired the commercial rights to Mosaic in August.
1995 Wired displayed the first banner ad.
1996 The Interactive Advertising Bureau (IAB) was established to help media companies increase their revenue through advertising. Member companies include many of the U.S.’s biggest Internet firms, including AOL, MSN and Google, among others.
1997 Overture, founded by Yahoo!, is the first online marketing service to display paid search engine advertisements.
1998 Sergey Brin and Larry Page raise $1 million in funding from family, friends and angel investors to start Google.
2000 The bubble burst in March, and IAB introduced skyscraper format ads.
2002 IAB set goal to double market size within three years.
2002 Google launched AdWords for advertisers.
2003 Google introduced AdSense, an offshoot program for Web publishers and advertisers who use Google AdWords.
2003 Advertisers gain confidence in the “front end” of Internet advertising—targeting relevant and engaging ads to their audience in a timely manner.
2004 IAB and PriceWaterhouseCoopers (PWC) announced that revenue from online advertising totaled nearly $2.3 billion in the first quarter of 2004, which was the highest quarterly total on record since PWC and IAB began tracking revenues in 1996. This quarter also marks a 38.9 percent increase over the first quarter of 2003.
2004 Broadband growth established itself as the key driver of content usage on the Web. Marketers embraced rich media and video advertising, allowing more creativity, the use of sight, sound and motion, and a level of measurability unavailable in other media.
2004 Paid search advertisements accounted for 40 percent of all online advertising spending for the year.
2005 Microsoft launches MSN Search.
2005 Barry Diller of InterActiveCorp acquires the AskJeeves search engine.
2005 With subscriptions declining, AOL shifted its focus to online advertising—and saw its ad revenue rise 46 percent in the first quarter of 2005.

But even Yahoo!, the grandfather of the search sector, is no match for the major-leaguer-on-steroids that is otherwise known as Google. In late April, Google’s market capitalization is more than three times that of General Motors Corp. Just for comparison, General Motors has 324,000 employees. Google has 3,000. General Motors’ 2004 revenues were $193.5 billion. Google’s 2004 revenues: $3.1 billion. Stock buyers are obviously putting a premium on Google’s rapid growth. The search company’s fourth quarter 2004 revenues were $1 billion—double the number it reported in the year-earlier period. For the first quarter of 2005, Google’s profits were $369 million—a nearly six-fold increase over the year-earlier period.

Carving into other media

The surge in online advertising appears to be coming at the expense of traditional media. The Washington Post’s executive editor, Leonard Downie Jr., recently lamented that his paper’s daily circulation has dropped 5.2 percent over the past two years. The Post has plenty of company. The Los Angeles Times’ circulation dropped by 6 percent last year and now stands at its lowest level since 1968. In its first quarter 2005 earnings release, Dow Jones, the owner of The Wall Street Journal, reported its advertising volume fell by 10 percent in March alone. Many other publications find themselves in the same predicament: increasing numbers of people prefer to get their news online—no ink stains and no stacks of old papers. For the newspapers that means red ink and more layoffs.

The radio business is also taking a hit. Clear Channel Communications, the San Antonio-based media behemoth, was the darling of the 1990s bull market. The company’s fourth quarter 2004 revenues were flat when compared to the last quarter of 2003, and overall revenue for 2004 grew by just 2 percent. The market for radio advertising may get worse before it gets better. In March, Merrill Lynch lowered its 2005 forecast for radio ad spending growth from 3.5 percent to 2.9 percent.

Clear Channel is trying to ramp up its Web presence. In March, it announced that it will begin offering free Web-based concerts and adding video content to some of its Web sites. The radio giant operates more than 1,000 Web sites, which get more than seven million visitors per month. The company will also make some of its live morning shows available for downloading to MP3 players, a process known as “podcasting.”

But it’s not clear if these new strategies will make a difference in a market where there is intense competition among different media—video games, the Internet, DVDs, movie theaters, TV, radio, etc. Internet use is increasing at the same time that radio listening time is declining. According to Arbitron (the radio ratings equivalent of TV’s Nielsen), radio listening time has fallen to about 20 hours per week. In 1993, that number was more than 23 hours per week.

Many factors are contributing to the declining fortunes of newspapers and radios. And their decline may be reversible. But it may also be true that those media are not providing the experience that is available on the Internet and that more consumers are responding to the online environment.

Neal Burns, an advertising professor at The University of Texas at Austin, says the Internet has an “urgency and immediacy that conventional access to information doesn’t offer—and can’t offer. I can research a product, I can buy it, download it, copy and synthesize it, and it’s all available in an instant. There’s a lot of power in that. As those processes get more sophisticated, that power will grow.”

Facing the challenges

Of course, many challenges loom for Internet-based advertising. Advertisers are not going to abandon all of their current strategies. TV spots on the Super Bowl—this year, a 30-second slot cost a hefty $2.4 million—are still going to be in high demand. Newspapers, while threatened, still get four of every 10 dollars spent on local advertising. Direct mail continues to garner about one third of all national advertising.

By 2010, according to Sanford C. Bernstein & Co., advertisers will be spending more than $22.5 billion per year on Internet advertising--an amount that will exceed spending on network TV advertising. Then there’s the Web’s equivalent of TiVo, a new technology called RSS, which allows Internet users to filter the news they receive. The RSS technology allows Web surfers to collate all the news sites—and blogs—they are interested in and have the headlines from those sources delivered to them on one screen, thereby allowing them to avoid Web advertising. (The solution? RSS advertising, in which consumers can “opt in” for specific ads.)

Despite the challenges, it is clear the Internet’s reality is finally catching up with the hype. And the future of online advertising lies not just in the U.S., but in the global marketplace. Between 2000 and 2005, Internet use in Africa, the Middle East and Latin America increased by more than 200 percent. In Asia, home to more than half of the world’s population, Internet use jumped by 164 percent. As those new Internet users become more savvy, the amount of time they spend online will almost certainly increase.

Mark Mahaney, a managing director at San Francisco-based American Technology Research, says that online advertising will inevitably follow this dramatic growth in Internet use. “Advertisers want to go where the markets are, where the ‘eyeballs and eardrums’ are,” says Mahaney.

Right now, the eyes and ears are going online. And the marketing whizzes are right behind them.

BY Robert Bryce


PHOTO of Dr. Mahajan: Marsha Miller

PHOTO of Dr. Whinston: Mark Rutkowski

Office of Public Affairs

P.O. Box Z
Austin, Texas

Fax 512-471-5812

  Updated 2005 August 22
  Comments to