Banner ad ultimatum - show me the money

When internet giant Yahoo! earlier this month announced it is expecting disappointing Q4 earnings due to lower advertising revenues a signal was sent out which many people betting on the new economy wanted to ignore.

It's no secret that online ad agencies and websites are currently suffering. The recent spate of dot-coms to hit the wall is sending shivers down the spines of their brethren, if only because they depend on each other for advertising revenue. The result is that the surviving dot-coms are tightening their belts, which in turn means less advertising spend generally. It's a downward spiral.

Research house Jupiter MMXI predicts the rate at which online advertising is growing will slow 20 per cent this year. Last year, spend doubled. This 100 per cent boom in sales for 2000 translated to between E650m (£415bn) and E950m (£607bn), depending on which figures are used.

It seems that just as revenues start to look healthy, a combination of sector downturn and change in the way dot-coms are run has started to take hold.

Steffan Engedegard, analyst at Jupiter MMX, said: "Right now there is a slow down because of dot-coms' financial restraints. It started with boo.com and more and more have floundered. On top of this there is a shift in focus to results not expansion. Investors now want results so the dot-coms have stopped spending. Marketing budgets have been cut."

In fact, many are now questioning the effectiveness of web advertising altogether. The popularity of banner advertising - which represents 65 per cent of all web advertising - is also expected to cool. The focus is turning to event sponsorship, direct email and classified ads.

Engedegard added that the problem with click rate - the method used for determining how much an ad should cost - is assessing the quality of a site's visitors. "If you don't care who sees your site then it is perfect. But if you want to build brand, measure brand perceptions and who purchases how much then you need more than banner advertising," he said.

The consensus seems to be turning towards a super league of about ten top sites commanding between 50 and 70 per cent of all online advertising. Yahoo! is likely to be one of these players, which arguably adds even more weight to its warning.

Hellen Omwando, analyst at Forrest Research, said: "To be a top tier player you currently need traffic and advertising revenue. Advertising money is essential because portals cannot survive just by being popular."

As consolidation increases, companies will need to become more adept at turning visitors into revenue. For example, online auctions and free email accounts all drive traffic but they don't all turn visitors into revenue.

A service such as MSN with Hotmail may well not be a winner in terms of ad revenue. Despite generating heavy volumes of traffic, it is not the best place to put online ads because people are less likely to click on banner ads within email services.

In this case the message is that sites have to offer more than free email. But what Yahoo! shows is that even its vast array of services - which include the second most popular free email service - doesn't guarantee the advertising revenue investors in the company are looking for.

And Forrester's Omwando added that what affects a company like Yahoo! also affects the net in Europe. "Nordic nations and the UK favour US companies because the US started the internet roll in these countries - it had first mover advantage. Plus, the UK is usually the point of entry for US companies which aim to lock customers in with content, email, auctions - all done to drive traffic and turn visitors into revenue."

It looks like the words of warning from Yahoo! may mark the beginning of a long year for those aiming to profit from the web. Many more dot-coms will see a decline in advertising revenue as they jostle for page impressions and - in a perfect world - eager advertisers.