Guest post by Ryan Floyd
Ever since its debut, online’s share of advertising has lagged behind its share of usage. The impressive ROI of search and contextual advertising by Google and its competitors raised expectations even higher, with many saying it was just a matter of time before online advertising earned its share of total advertising spend. Strong double-digit growth online advertising rates through most of the mid-2000s, while traditional media advertising foundered, seemed to corroborate the conventional web wisdom. But can web advertising really continue to capture, dollar for dollar, the spend traditionally spent on television? I’m not so sure.
Even while the online advertising world weathers the current downturn, expectations for a rebound are common. Why? Usage patterns continue to shift, with more time being spent online (particularly watching video and on social networking sites). Online advertising consumes only 8% of total US ad spend, but Web usage comprises some 30% of leisure time among American Internet users (more than half of the entire population). The gap must be filled, right? And what better than an advertising medium that provides exceptional visibility into its value, in the form of impressions, clicks and conversions.
The problem is that the performance basis of evaluating the effectiveness of online advertising is really only the case for search/contextual, and indeed that continues to grow at a healthy clip. Lead generation and transaction-oriented advertising has proved remarkably efficient and cost-effective in many cases. Display advertising’s value relies on the promise of expanding brand awareness and engagement, and current display and rich-media advertising fails to deliver the same impact as a 30-second spot in front of a passive, captive audience. If you remove high quality online video, like Hulu, from the discussion, since it is simply replicating television’s advertising model through a different distribution medium, it gets harder to believe that engagement across social networking platforms or content sites has the potential to create the same market size as compared to dollars spent in traditional media with similar objectives.
It should come as no surprise that the IAB is championing more inspirational, creative online ads, and that startups like VideoEgg are introducing CPE (cost per engagement) and other revenue models that emphasize the depth of users’ interaction with online advertising. When it comes to delivering on its own objectives, the finest online ad creatives have to do a lot to catch up to your average Super Bowl TV ad.
It’s not difficult to imagine that the spend-usage gap will continue to close, but it is easier to imagine that ROI-driven search and contextual advertising will take a larger portion of that growth. Display and rich media will likely fare much worse, growing in dollar terms but far less than the 1:1 spend we’d expect to be flowing to the likes of Facebook and Google publishers from traditional media.
Ryan Floyd is a founding member of Storm Ventures, and sits on the board of directors at YieldBuild.