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By Carl Howe

Yesterday's New York Times had a terrific article about the state of click counting in online advertising . The lead:

Internet companies have had great success selling advertising space, in part because the effectiveness of those ads is supposedly so easily measured. But marketers, even as they continue to push more of their ad budgets online, are starting to ask for better proof.

A group of large companies, including Kimberly-Clark (NYSE:KMB), Colgate-Palmolive (NYSE:CL) and Ford Motor (NYSE:F) have said that by the middle of 2007, they will demand that online publishers hire auditors to check their ad and viewer counts. And analysts say they believe that online ad growth over the long haul will depend on the eagerness of large advertisers like these to shift more dollars online.

But I think some of the more interesting data is later in the article, where the author talks about online advertising spending, something we study as well:

Concerns about click fraud and viewer statistics do not appear to be affecting online advertising revenue right now, but ad agency executives said the issues must be resolved before large advertisers would want to pour much more money online.

Indeed, the Internet draws only a sliver of the total spent on advertisements. Last year, Internet ads accounted for just 4.7 percent, or $12.5 billion, of the $267 billion spent on advertising, according to the Interactive Advertising Bureau, a trade association of online publishers. And the top 50 advertisers spent just 3.8 percent of their budgets in the first half of this year on online ads, excluding search, TNS Media Intelligence data shows. For all other advertisers, the average spent online was 6.8 percent of the budget.

Procter & Gamble (NYSE:PG), the nation’s biggest advertiser last year, spent $33.5 million — less than 1 percent of its $4.6 billion ad budget — on online ads in 2005. General Motors (NYSE:GM), the second-biggest advertiser, spent $110.5 million online, or 2.5 percent of its $4.35 billion total, according to TNS, which does not include search ads in its figures.

As I read this closely, I came up with a couple of insights:

1. The largest advertisers spend below average percentages on online advertising. The top advertisers in offline advertising spend between 1% and 4% of ad budgets on online. Why so little? Perhaps because they invest most of their ad budgets with advertising agencies that make more money from an offline media buy than from putting up ads on Google (NASDAQ:GOOG). Online advertising provides huge value for the media dollar and since agencies typically are paid a percentage of the advertising spend, this has the effect of driving down their fees.

2. Most of these figures ignore search advertising. As John Battelle notes in his terrific book, The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture, one of the powerful concepts behind online advertising is the fact that it matches advertising to viewer intention. All of the figures quoted above from the IAB ignore search advertising. So these advertising figures grossly underestimate actual online effectiveness. It's kind of like quoting TV advertising revenues excluding prime-time shows. Said another way, there's a reason that Google is making a billion dollars a quarter in advertising revenues, and it isn't because they run the equivalent of display ads better than anyone else.

So what, you ask? My point is that while click fraud is an important concept to keep an eye on, it's not quite the killer problem for online ads that the article portrays. And it's no accident that the primary beneficiaries of this study into click ad fraud are a couple of private companies that are owned by traditional agencies. The final quote of the article demonstrates that despite the issues of click fraud, it probably won't slow the growth of online advertising any time soon:

Though both advertisers and online publishers say more standardized measurements will help, industry experts say discussions on ad numbers tend to go on forever.

“Believe me, we’ve been talking about measurement in print for years, we’ve been talking about measurement in television for years,” said Barbara Bacci Mirque, the executive vice president for the Association of National Advertisers. “Probably we’ll be talking about measurement online for years.”

Source: NY Times' Predictions Aside, Click Fraud Won't Slow Online Ad Spending