The Economic Realities of Online Advertising
From 1994 to 2000, ad banner placement rates as high as $80 per 1000 pairs of eyeballs which saw each page that ad was on (called "pageviews" in the trade) were common. The theory (at the time) was that Internet users were more "engaged" than users of other media; that because of the Net's interactivity, ads on Web sites had a higher impact than TV spots or print ads. Another attraction of Web advertising was
; most early Web users were young, male, and prosperous, and by definition were early adopters, more
to new services and products than the general population. But what did they adopt early? Obviously, they bought computer hardware and software, Internet services, and other
items. But there was never any hard evidence that Internet users were more likely to buy consumer products as a result of Internet advertising than if they saw ads in other media touting them, so Internet ads did not
to packaged goods companies, like Proctor & Gamble or Lever Brothers, that are typically among the most prolific TV advertisers in the United States.
At $80 per thousand pageviews at the top end, 1990s Internet advertising was at least 10 times as expensive as prime-time TV. This might have been okay for companies in the computer industry,
for ads on "geek" sites
almost entirely by their most likely customers, but it
wasn't Anheuser-Busch's (or Lipton's) cup of tea. Perhaps one reason AOL has always been more successful than most at selling online ads is that it has tended to price well under the "dream" prices seen on other major online publishers' rate cards, with $5 to $15 CPM (cost per thousand pageviews) on many of the network's services in 1997, and as low as $2 CPM for some of its offerings after the "advertising meltdown" in 2001.
At $80 CPM—or even at a more common $40 to $50 CPM after haggling down from posted prices—a small solo entrepreneur could earn a decent living from 10,000 loyal readers who each
10 pages on his or her site every week, or 100,000 total pageviews, which translated into $5,000 per week of gross income at $50 CPM, and $8,000 at $80 CPM. If you figure $2,000 per month for server and bandwidth expenses—the online equivalent of printing costs—and give half of the remainder to freelancers or a couple of salaried assistants, then online news looks like a lucrative business.
Now try to run that same site, with the same 100,000 weekly pageviews, on an income of $2 CPM. Suddenly gross income is $200 per week. Server and bandwidth charges may have dropped to $1,000 per month because the Web hosting business got more competitive between 1997 and 2001, but the site is still in the red.
By 2001, even
tech-news sites were having trouble getting more than $10 CPM for top-of-the-page banner ads, which
that 100,000 pageviews per week were no longer enough to earn a profit from a site that employed professional
and editors. Many news sites gave up and closed. Others hung on, hoping for a
. But hardly
in the business was making money. Too many had based their business plans on 1997 or 1998 ad rates, and their expenses had gotten so high that there was no way they could ever make money without ads rates going back up to where they were in "the good old days."
Those days are not going to come back. From now on, Web sites planning to earn the bulk of their living from advertising must face the fact that they will have to live with rates comparable to those charged by their offline competition for similar exposure.
Perhaps, as seems to be the case with book publishing, the future of ad-supported Web publishing belongs to the very large and the very small. A small
of journalists whose material is unique and interesting enough to appeal to at least 100,000 daily readers, and who have either plenty of sales ability or enough sense to team up with a competent marketing person from the very start, may be able to earn a living
out online news, and large, well-financed publishers can probably make a go of the business if they are extremely canny about every step of their Web activity and are very cost-conscious, but the in-between arena may never be profitable, especially for purveyors of general, as opposed to niche or