Imagine it’s 1998. While the Internet has been around quietly for decades, the World Wide Web — or what most of us now think of as “the Internet” — is only four years old. But already, companies have figured out that advertising such as banner ads displayed at the top of search engine results and on Web portals can be worth money. Lots of money.
In 1998, it was estimated that online advertisers spent $1.92 billion on Web advertising with the promise of huge increases as Web use increased exponentially. But was the lure of potentially huge online advertising revenue too good to be true? Microsoft (NASDAQ:MSFT) didn’t think so in 2007 when it dropped a cool $6.3 billion to snap up digital marketing firm aQuantive in an attempt to outdo Yahoo and Google in the fight for Internet display ad supremacy.
Fast forward five years, and it’s a whole new ballgame online, something that became painfully apparent for Microsoft when it recently announced it was writing off the aQauntive purchase as worthless, taking a $6.2 billion charge in its fourth quarter. In the press release about the move, Microsoft says:
“While the aQuantive acquisition continues to provide tools for Microsoft’s online advertising efforts, the acquisition did not accelerate growth to the degree anticipated.”
A bit of an understatement.
While display advertising isn’t going away and the number of users online continues to grow, three problems are hitting the traditional display ad market, reducing its profitability:
- There’s a supply glut. Ten years ago, if you wanted to advertise on a site that was guaranteed to draw a ton of visitors, selection was limited. Today, in addition to the traditional Web portals, search engines and popular media conglomerates, social media giants like Facebook are in the game.
- Search today is increasingly done via mobile devices. Combined with mapping functions, local search has a much higher value for advertisers (and therefore a higher revenue potential for the companies selling ad space). That’s because customers are often in a neighborhood and actively searching for a specific product or service in the area with the intention of actually shelling out money.
- There’s a growing feeling from advertisers that display ads simply don’t work. People have grown so accustomed to seeing banners and ads plastered all over their browser that they zone out and ignore them. Worse, evidence is growing that even when someone clicks on an ad (which seldom happens — only 0.1 % of U.S. banner ads get clicked, a number that reportedly drops to 0.05% when the banner is on Facebook), there’s next to no relationship between that click and the sale of a product or service.
The net result of all this is a drop in rates for display ads from that $25 per 1,000 in 1998 by more than half, to $11.50 per 1,000 currently, according to BusinessInsider. The trend has been all downhill since the heyday of the late 90s, something that has helped contribute to Yahoo’s woes (with its stock price dropping from over $100 then to the $16 range today).
This also explains the growing fierceness in the battle over mapping apps on mobile devices. Apple (NASDAQ:AAPL), Google, Microsoft, Yahoo and now Amazon (NASDAQ:AMZN) are battling for the eyes of smartphone-toting consumers. And this growing trend from display ads to mobile ads is also worrisome to Facebook (NASDAQ:FB), which earned $1.73 billion last year on U.S. display advertising but suffers from lower than average click-through rates on banner ads and is struggling in the mobile space.
It’s still unlikely that you’ll see a day when firing up a Web browser and searching on your PC will return an uncluttered, purely informational display. Banner ads aren’t going to disappear.
But between the glut of available space and doubts about their effectiveness, display ads are less profitable than companies like Microsoft expected they would be. And all the while, mobile ads are proving that they’ll likely be the next gold rush, both in terms of numbers of users available as a market and in value as highly targeted advertising.
Put in that perspective, don’t expect Google to roll over and let Apple’s Maps take over on the iPhone — where Google earns 80% of its mobile ad revenue — despite Maps becoming the default mapping app in iOS 6. And look for more companies to pull an Amazon and try to acquire the pieces to move into the increasingly lucrative mobile search market.
As of this writing, Brad Moon doesn’t own any securities mentioned here.