Ad-driven Net firms in danger

CHICAGO--If their Wall Street valuations are any indication, advertising-supported media companies are ruling the Internet roost these days. But the nature of Internet advertising may cause a precipitous fall for these firms, attendees here at Internet World learned today.

Optimism about the potential of Internet media companies--specifically the content aggregators known as "portals"--is predicated on faulty assumptions about the role and value of Internet advertising, according to Forrester Research senior analyst James Nail.

The Achilles' heel of the Net advertising model appears to be one of the most fundamental characteristics of the Net itself: the ability of any person or company with a computer to make a direct connection to any other person or company with a computer. The challenge of media companies is to find a valuable role in a medium that essentially has eliminated the advertising middleman.

"The thing that is dramatically different in this business is the ease with which companies can create a direct relationship with users," Nail said. "It's not that you're going to totally supplant advertising, but the focus has shifted from customer acquisition to relationship marketing and developing customer loyalty."

Nail cited several instances of companies that are using Web sites to develop and maintain these kinds of relationships, including the famous example of direct computer vendor Dell Computer and the less well-known Web enterprise at Dow Chemical, which boasts 60,000 Netizens registered with a personalized version of the Web site. Customer relationships such as these pretty much leave the advertising business--along with the media companies that rely on it to pay the bills--out in the cold, Nail said.

"I have not yet seen a case where a media company has found a way to insert itself into that kind of relationship," he said.

One means of measuring the Internet's overvaluation as a content medium is an advertising metric known as the "reach premium," which reflects the difference between the percentage of total ad revenue a company receives and the percentage of the available audience it reaches. For television, the six top networks get 84 percent of advertising revenue and 67 percent of viewers for a reach premium of 25 percent. In print, People and TV Guide together get 8.9 percent of the ad revenue and 7.3 percent of circulation for a reach premium of 22 percent.

On the Internet, the top nine portal sites combined collect fully 59 percent of the available ad revenue while drawing only 15 percent of page views for a whopping reach premium of 293 percent.

"Over time, this number will fall to earth," Nail warned.

The peril for media companies in the face of an unsound advertising model is heightened by other challenges inherent in the Internet--for example, the potentially infinite competition for traffic and the resulting unwillingness of consumers to pay for content through subscriptions.

In addition to the excess of supply, media companies are faced with the fact that many consumers look at their access charges--approximately $240 per year--as a subscription to the Internet. As a result, they are disinclined to pay more for content.

Most important, however, is the fact that media content draws fewer eyeballs than other Internet activities. According to Nail, email is the No. 1 activity online for 83 percent of users. No. 2 is searching, with a 67 percent rating. More directed research gets a 46 percent rating.

Supporting Nail's contention that the Internet has let customers and companies bypass the advertising middleman, the prevalence of visiting corporate Web sites outpaced accessing media content 44 percent to 36 percent.

Nail's presentation was entitled "What Kind of Shakeout Is Ahead?" But the only direct answer to that question came in a comparison to two roller-coaster rides at the Chicago area's Great America theme park.

In one of these, the rider plunges all at once in a dizzying drop. In another, the ride twists and turns through corkscrews and sudden dips and rises before coming back down.

Whatever the method of descent, Nail had one firm prediction: "It's going to be a wild ride."