By Stefanie Olsen
Staff Writer, CNET News.com
April 29, 2004 4:00AM PT

The same joke has been around the ad industry for decades: "Half the money I spend on advertising is wasted. The problem is, I don't know which half."

But that line, as old as Madison Avenue itself, may be headed toward obsolescence, as the dawning era of digital advertising helps identify those two halves.

After years of failed promises for ads that can pinpoint targeted consumers, traditional media are finally taking interactive advertising seriously, on the Web and beyond. Companies that have advertised for years on platforms ranging from television to billboards are rethinking their marketing strategies, as Internet advertisers work through the technology glitches and privacy issues that have challenged the first wave of the technology.

Rather than simple brand exposure, advertisers are adopting a new mantra: accountability. Pointing to the success of Internet pioneers like Google, advertisers are seeking similarly efficient kinds of correlation between their products and what consumers are searching for, especially as devices like digital video recorders (DVRs) enable viewers to skip standard TV commercials. It is nothing short of a seismic shift for many established advertising agencies, which have often been cast as dinosaurs in the Information Age.

"The creative community is still fixated with 30-second commercials, and the clock is ticking," said Chuck Fruit, senior vice president of integrated marketing at Coca-Cola, adding that brands like Coke spend roughly three-fourths of their ad budgets on television. "That percentage will go down steadily for the next decade to well under half."

Industry research tends to support that prediction. An estimated 75 percent of national advertisers plan to cut spending on TV commercials by at least 20 percent in the next five years, when advertisers believe that ad-skipping devices like TiVo will be widespread, according to Forrester Research.

Advertisers say the Web will be the biggest beneficiary of the shift, followed by new forms of interactive television and video-on-demand ads, according to Forrester. That migration will spur greater demand for new tracking technologies that can measure the effectiveness of ad campaigns--hence, the accountability--in online and offline media.

Although the advertising business will not change overnight, some Internet ad practices are already gaining credibility in other media and could soon take dollars away from static outlets such as billboards and print publications. As the demand for accountability rises, advertisers are certain to devote more resources to "performance-based" campaigns, which now represent only about 1 percent of an estimated $260 billion spent on overall advertising each year.

On the forefront of this trend is a company that hopes to become the Google of television: TiVo, whose DVRs are already a fixture in about 1.3 million homes. TiVo is developing a technology infrastructure that would enable content owners to pay for exposure in search results for video, TiVo President Martin Yudkovitz said in a recent interview.

The system will enable TiVo subscribers to type in a search for Julia Roberts on their DVR, for example, to find a list of video clips or films featuring the actress. Marketers would be able to pay for greater visibility in those search results.

The cable industry is experimenting with new technology to avoid missing this enormous opportunity. Visible World, a digital-media company backed by cable TV operator Comcast, is using technology to target commercials to Comcast's 20 million cable households, based on viewer interests or locations. SeaChange International, too, has recently folded targeted ad capabilities into its video-on-demand servers, used by Cox Communications and Clear Channel Communications.

"We'll see an increased merging of two worlds: the performance-based world of Internet Protocol networks with the engaging world of TV and gaming," said Rishad Tobaccowala, executive vice president of Starcom MediaVest Group, a Chicago-based advertising media conglomerate.

Driving the trend is a larger transition by traditional media to deliver content through Internet Protocol networks, the byways of the Web. An array of home and mobile devices--and even billboards--will be connected to IP networks, bringing access to any content, anywhere, on demand.

These are the digital thoroughfares that afford new capabilities to track how, when and to whom marketers deliver their ads. As a result, traditional advertising firms will increasingly need to hire digital-technology companies that can pinpoint their target audience and monitor the effects of their messages.

In a sign that such practices are truly taking root, they are already acquiring their own industry jargon. Comcast's technology is known as "addressable advertising," while others in the television industry are adopting the Internet term "behaviorally targeted advertising." In fact, advertising executives are beginning to call today the Age of the Consumer.

Accountable advertising will be driven further by the expansion of electronic media delivered through the Internet--especially to consumers with fast broadband connections. DVD rental company Netflix, for instance, recently announced that it will begin delivering movies over the Net next year.

At least three-fourths of national advertisers are interested in targeting commercials to individual households through video-on-demand services on cable, satellite and the Web, according to Forrester. In addition, more than 90 percent of advertisers want new measurements for ad ratings and program viewing, outside of what standard bearer Nielsen Media Research's panel-based service offers. They say the television industry will need to report new audience measurements beyond classical benchmarks like the number of people reached and how often they viewed an ad.

"The whole accountability landscape for advertisers is evolving to outcomes like sales, changes in brand awareness, changes in attitude and behavior," said Fruit of Coca-Cola. "And technology is giving us the wherewithal to make that evolution."

That's a marked contrast from the meme of an established medium like television, through which companies typically aim commercials at a broad swath of consumers with certain demographics, then cross their fingers and hope that their ads sink in. Still, as Web advertising has proven, the concept of accountability has been no easy task.

As the Web's popularity took off in the mid-1990s, companies touted accountability through technology that can monitor surfing behavior, create consumer profiles and deliver targeted advertising. But after awhile, few people clicked on Web page ads, hampering adoption of these technologies. Ads grew ever larger in an attempt to draw more attention, eventually giving rise to pop-ups that inspired a backlash wave of ad-blocking tools.

Privacy concerns further stunted plans to profile Web surfers and deliver targeted ads. DoubleClick retracted from the media business entirely, after the Federal Trade Commission began to investigate the company's plans to merge personal information from offline sales with surfing behavior from its ad network.

Since then, however, Internet companies have made significant strides in the viability of interactive advertising.

Yahoo's Overture Services, formerly GoTo.com, revolutionized Web search and advertising by proving that getting a decent click-through rate was not an unreachable goal. Appealing to tight budgets after the dot-com bust, it sold marketers tiny text ads that appear when people search for keywords related to their products. People clicked, because many Web searches are commerce-related. It also proved that publishers can make money on Web ads.

Google stole some of Overture's thunder by improving Web search so dramatically that it became one of the most recognizable Internet brands around the world and the largest search-related ad network. For that reason, it has helped propel growth in the online-ad industry. During the fourth quarter, 40 percent of total online ad sales came from paid search, compared with a 21 percent share in 2002's fourth quarter and 6 percent in 2001.

Financial analysts and investment bankers estimate that Google will earn between $750 million and $1 billion in revenue this year, and that it will raise the largest sum in an initial public stock offering since 2000.

"People will begin to take notice of the paid-search business and what it means--which is a shift from impression to performance advertising," said Geoff Yang, a partner at investment firm Redpoint Ventures.

Performance-based deals are already becoming dominant on the Internet. In the fourth quarter of 2003, Web advertisers devoted 41 percent of their budgets to performance deals that delivered a click or a customer, (epitomized by search engine ads), according to the Interactive Advertising Bureau. That's up sharply from 26 percent in the same period of 2002, and it runs in contrast to standard deals that require advertisers to pay when their ads are merely shown, or for an "impression." Those deals comprised 40 percent of 2003's fourth quarter, down from 46 percent in 2002.

At the same time, ad network companies such as Advertising.com, aQuantive and 24/7 Real Media are selling performance-based advertising that relies on monitoring Web-surfing behavior and serving up more targeted ads, all purportedly while maintaining people's privacy. Ad technology firms Tacoda Systems and Revenue Science, are similarly using technology to help online publishers like The Wall Street Journal and The New York Times profile their readers.

aQuantive's newly formed unit, Drive Performance Media, buys excess online inventory at multiple Web sites and profiles visitors and their behaviors across those Web sites without using personally identifiable data. After watching a user visit many pages on business technology, it might deliver a Microsoft ad, and because it's targeted, it can sell that ad at a higher price.

"We're going to see a transformation in the industry to what we envisioned five years ago to be a much more accountable medium, where advertisers get fair value and see results, and publishers get fair value for their content, and users get a much more meaningful, relevant experience," said Scott Howe, general manager at Drive.

All these online advances have whetted the appetites of traditional media advertisers--and many of these technologies are already infiltrating television and wireless media, through video-on-demand and DVRs. Some traditional advertisers, along with online-ad companies, are pushing for technology that can measure the performance of campaigns across various media.

"Accountability was painful for the Internet community, but in some ways, it was aspirational," said Dynamic Logic's Nyhan. "Once advertisers started to taste that, it changed the culture, and they wanted to extend that to all mediums. It's happening slowly, but it is happening."

Still, media executives say brand advertising will become even more important in a performance-based landscape, because companies will need to stand out from the pack and build loyalty among consumers.

Brand advertising, which is generally based on exposure and not on click-through rates, is beginning to surge online with new video commercials and larger display ads.

Yahoo reported 40 percent growth in revenue in 2003 from paid search advertising and brand ads, and it expects another 35 percent increase this year. Microsoft's MSN recorded ad sales of $1 billion last year, thanks to paid search and new "rich media" ads that let Fortune 1,000 companies like Ford Motor leave an impression with online consumers. Total 2004 online ad sales are expected to be more than $8 billion.

Brand advertisers increasingly want to form relationships with their consumers digitally, even if they're not selling directly to them--and they want the chance to see if those relationships are progressing. Coke, for example, may not sell directly to consumers, but it can make an impression on them with its Coke Music Web site.

Traditional ad executives say that among their top priorities for Internet marketing is getting into rich-media ads, which weren't even on their radar the previous year, according to the Jack Myers Report, an advertising industry newsletter, Also on the list: pre- and post-campaign brand tracking. Strategically, the No. 1 priority was cost efficiency, the survey found.

Joe Uva, president and CEO of OMD Worldwide, a traditional agency that creates and plans media for large companies like Pepsi, believes that the timing of the accountability mantra and the booming paid-search market is coincidental. Companies have always wanted more efficiency from their ad dollars, he said, so it was only a matter of time before they found the right tools amid all the advancements of modern society.

"Advertisers spend substantially more money to deliver their messages than they do in making them, so you'd like to know what you're getting for that. Over time, advertisers will move to more of a hybrid strategy, mixing highly accountable response-driven ads with brand advertising," Uva said. "New technology creates new opportunity."