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Ad weather

Softening ad market, Yahoo!, Compaq's ad campaign and Disney's bigger ads, just some of the meteorological patterns developing over the advertising industry.

Yahoo! has been hit so hard lately it's amazing there's still an exclamation point in its name

Downgrades and earnings concerns resulting from a weakening online advertising market have sent Yahoo!'s shares into a free fall. With more than 80 percent of its revenue derived from advertising, it's not surprising Yahoo! was pulled down by the same forces afflicting content sites like Ask Jeeves and ad concerns like 24/7 Media, DoubleClick and Engage. Analysts expected the soft online ad market to last through mid-o late 2001.

While the advertising-based model remains questionable, many Wall Street analysts and advertisers weren't writing off the value of the medium for marketers. Many said the Internet is the only vehicle that gives advertisers immediate feedback and lets them respond accordingly. The Net offers advertisers unprecedented targeting capabilities, advocates said, and is the only medium that enables consumers to seamlessly buy products after seeing an ad.

Contrary to what some dying dot-coms may believe, Internet advertising has actually been growing for 17 consecutive quarters, according to the latest data from the Internet Advertising Bureau and PricewaterhouseCoopers. Online advertising revenue for the second quarter totaled $2.1 billion, a 127.3 percent increase over the second quarter of 1999; third-quarter numbers are expected shortly. The number of new companies advertising online is growing at an average rate of 14 percent per month, according to AdRelevance, a division of Jupiter Media Metrix. Jupiter expects spending to grow to $16.5 billion by 2005, up from its 2000 estimate of $5.3 billion.

That's why many of the same analysts downgrading Internet stocks expect to see both online advertising — and Yahoo! — rebound nicely in the long term. "We continue to believe that Yahoo! has built an impressive brand and will be a primary beneficiary of a turnaround in the online advertising market," Robertson Stephens analysts Lowell Singer and Lauren Cooks Levitan wrote in a note to investors. Robertson Stephens has been an underwriter for Yahoo!'s securities and has an officer on Yahoo!'s board of directors.

Most analysts agree that growth will come from traditional advertisers, which have generally been watching and learning from the wreckage. "We look at it like a leaking bucket, with dot-coms leaking out of the bottom and traditional advertisers pouring in," said Peter Daboll, president of Advertising.com, which helps advertisers with their integrated marketing campaigns.

When content sites first launched on the Net, dot-com advertisers were preferred because they didn't have to go through intensive testing and other steps of the sales cycle common to offline brands. But when venture capital money started drying up in April, dot-coms were forced to abandon their large advertising budgets. As a result, sites had dropping ad rates, empty inventory and longings for advertisers with deep pockets.

Many analysts said traditional advertisers would outnumber dot-com advertisers by mid- to late 2001, and targeted that timeframe for the online ad market's renewal. Merrill Lynch & Co.'s Henry Blodget predicted that traditional advertisers, which currently make up nearly half of online advertisers, would comprise 62 percent of the market by the end of 2001. Incidentally, the dot-com shakeout, coupled with weak financial markets, has contributed to softness in ad spending on other media, including newspapers.

Compaq Computer is among the strong advertisers that found the Net attractive. It decided to advertise on the Walt Disney Internet Group sites as part of a three-year marketing and distribution deal valued at $100 million. "This is much broader than just some random banner advertising; this is part of a well-orchestrated joint campaign," said Mike Winkler, executive vice president of global business units at Compaq.

Winkler's sentiment about the inadequacy of banner ads is one shared by many in the industry. Disney is among the sites experimenting with ad formats. Earlier this fall, it began offering advertisers its premium-priced "big impression," which is 30 percent bigger than the standard banner.

Other new advertising options include e-mail, sponsorships, rich media, keyword searches and interstitials, which pop up while a page is loading. Rich media ads, which resemble TV commercials, are expected to become popular as more users gain access to broadband and as measurement methods improve.

Yet, many Web developers are having trouble convincing their bosses to expand beyond the banners and often find it tough technologically to implement new formats. "The challenge is to get to a point where [rich-media ads] can be implemented as simply as the banner," said Mark Stephens, director of media services at interactive agency Lot 21.

Online advertising is still maturing. But as the IAB and PricewaterhouseCoopers have pointed out, the Net is the only ad-supported electronic medium to reach $4 billion in yearly ad revenue in its first five years. TV took six years to reach that goal, cable TV needed 13 years and radio more than 30 years.

Like those media, a concentration of top properties that advertisers want to be on has developed on the Web, which no doubt includes Yahoo!. "That's a good sign when you see similar attributes to established media," said Peter Petrusky, director of new media at PricewaterhouseCoopers. "That suggests traditional advertisers are portioning part of their budgets to the medium."

For Yahoo!, developing alternative revenue streams may be the only way to survive the next few quarters — with exclamation point intact.