by Brad Moon | July 11, 2012 12:36 pm
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.
Yahoo! (NASDAQ:YHOO[1]), AOL (NYSE:AOL[2]) and a newly incorporated Google (NASDAQ:GOOG[3]) have recognized this and are charging upwards of $25 per 1,000 displays for premium ad space.
In 1998, it was estimated that online advertisers spent $1.92 billion on Web advertising[4] 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[5]) didn’t think so in 2007 when it dropped a cool $6.3 billion to snap up digital marketing firm aQuantive[6] 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[7] 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:
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[10]. 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[11]), Google, Microsoft, Yahoo and now Amazon[12] (NASDAQ:AMZN[13]) 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[14]), which earned $1.73 billion last year on U.S. display advertising[15] 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[16] — despite Maps becoming the default mapping app in iOS 6[17]. And look for more companies to pull an Amazon[18] 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.
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