ARCHIVE :: DECEMBER 2002 :: COVER STORY

Missing Out

Online Advertising Rebounds,
But Not at AOL

By MYLENE MANGALINDAN AND JULIA ANGWIN
Staff Reporters of The Wall Street Journal

As the biggest player in the sector, America Online says its revenue from ad sales is likely to plummet 41% this year. In most industries, the struggles of the largest player would be felt by its competitors as well. But in online advertising, after a miserable 2001, that doesn’t appear to be the case. America Online is doing much worse than its peers.

Most forecasters are predicting that online-advertising sales will be flat or only slightly down, compared with last year’s $7.2 billion total. Considering that those numbers include America Online’s $1 billion decline, the industrywide data suggest that some of the other players are benefiting at AOL’s expense.

“America Online’s situation is somewhat unique to them and it doesn’t tell the whole story,” says Michael Zimbalist, executive director of the Online Publishers Association. “There is an underlying rate of growth there” in the industry.

Among online publications gaining steam are Walt Disney’s ESPN unit, which says its Web ad sales have increased by a double-digit percentage. The Wall Street Journal, published by Dow Jones & Co., says Web ad sales were up 24% in the third quarter. Martin Nisenholtz, chief executive of New York Times Digital, says advertising is up 30% this year for three reasons: prices have dropped, the ads have gotten bigger and flashier, and advertisers are recognizing the Internet as a good way to reach people while they are at work.

Even Yahoo, which was hit almost as hard as America Online by the collapse of the dot-com boom, says its ad sales rose 22% in the third quarter.

Nielsen//NetRatings says online ad spending rose 15% in the third quarter from a year earlier, after declining 8% in the first half of the year. “There seems to have been a nadir in the first quarter,” says Charles Buchwalter, vice president at Nielsen//NetRatings. “The numbers have been on an uptick in the second quarter and into the third quarter.”

There’s no way to know exactly how much discounting is going on in the industry, but there’s no question that price-cutting is making Internet advertising a bargain for companies with stretched marketing budgets.

America Online reported a 48% decline in third-quarter advertising revenue, and has warned that its ad sales will be as low as $1.6 billion for the year, down from $2.7 billion last year. The reason for the disparity? America Online used to craft big advertising deals in which companies would pay millions of dollars to sponsor a section of the online service for several years. But those arrangements now are considered too expensive and unable to yield promised results, and they are due to expire over the next year.

Now America Online is trying to reorganize itself to sell advertising in a more traditional fashion. The company has cut prices, streamlined the sales process, and rearranged its sales force along regional lines so that advertisers have a local contact. “Overall, it’s still a relatively weak online ad climate and we’re confident that as the environment picks up, we’ll get our fair share of new sales,” says an America Online spokesman.

One reason for the gains in the rest of the industry is that big traditional advertisers like McDonald’s are experimenting with online advertising and are studying the effectiveness of online advertising in the marketing mix. By reallocating, instead of increasing, their budgets, companies like McDonald’s have found they can raise awareness of their new products without spending more.

Another key factor in the resurgence of online advertising has been so-called rich media, or the animated advertisements that move or interact with computer users. Eyeblaster, an advertising-technology company that delivers “floating ads” that appear superimposed on Web pages, and expandable banner ads and other formats, says business has been brisk.