October 6, 2010

“The death of display advertising has been greatly exaggerated,” Randall Rothenberg, CEO of the Interactive Advertising Bureau, said last week at the trade organization’s MIXX conference.

True, rectangular “banner” ads, in-stream video commercials and other so-called online “display” advertising accounted for more than a third of the nearly $23 billion spent on Internet advertising last year, according to David Silverman in a PricewaterhouseCoopers report prepared with the IAB.

But there was another 800-lb gorilla in the room at MIXX. Social media such as Twitter and Facebook are rapidly becoming venues where marketers connect with customers and spend dollars that previously may have gone to more traditional Internet ads.

Dick Costolo, who was just named Twitter CEO, talked about the power of the platform and its new advertising efforts, such as Promoted Tweets and Promoted Trends. Investor Yossi Vardi, who helped launch the ICQ chat standard, likened the future of social media to “the future of civilization,” quoting Amazon.com founder Jeff Bezos as saying the likelihood you’ll buy a car is 500 percent higher if a friend recommends it.

Even as Sheryl Sandberg, COO of Facebook, touted the ways that display ads can be used on Facebook, many at the conference discussed how social interactions on fan pages and through its Open Graph (formerly Facebook Connect) get consumers to buy at a much higher rate than advertising alone ever has.

So is social media killing display ads?

Display ads growing, but…

A closer look at the Pricewaterhouse study shows that while display ads ticked up to a 35 percent share of ad spending in 2009 (from 33 percent in 2008), search grew by the same 2 percentage points but a higher dollar amount (from 45 percent to 47 percent). Search’s share has risen sharply over the past four years while banners have been essentially flat.

Plain old banners, too, are declining in relevance. The money spent on ads sold on an “impression” basis — that is, based purely on someone seeing them — is down sharply compared to “performance” ads that require an action, such as a click. That trend is likely to continue.

YouTube executives at the conference introduced their new “cost-per-view” advertising format, in which a viewer is given a choice of which ad to see in a video, or given a choice to skip an ad after five seconds. The marketer pays only for a video that’s been shown.

The effectiveness of these ads, said the executives, can be 10 times as high as for interruptive ads (the term for any type of ad that delays the user from accessing the content he seeks).

New startups from high-profile entrepreneurs are also offering to help advertisers get into the social stream, promising higher effectiveness than from display ads.

Two days after MIXX and a few blocks away at the Web 2.0 conference, Jonah Peretti, a cofounder of The Huffington Post, showed off new startup BuzzFeed, which in May closed an $8 million second round of venture capital financing. The company, now in beta, uses some of the same technological and editorial techniques of HuffPo to inject conversations prompted by marketers into the social stream while trying to score viral hits.

Social media as salvation, too

Whether or not BuzzFeed or YouTube’s initiatives succeed, they’re clearly part of a trend of marketing dollars moving away from typical banner ads and toward user interaction and social media.

Publishers earning revenue from display ads priced on impressions will find themselves competing over a shrinking pie. Hearst Corp. CEO Frank Bennack Jr. noted at MIXX that there is “no longer an inventory shortage” for advertising as there once was in magazines and newspapers, and that his companies’ online publications need more than just advertising revenue to survive.

There is some hope for display ads, though — and it’s based on social media and the ability to customize ads based on user interaction.

Showing off new display ad products still being tested, Barry Salzman, Google’s managing director for media and platforms for the Americas, said that by 2015, 75 percent of ads will be “socially enabled.”

His colleagues showed new “dynamic display advertising” formats that allow on-the-fly customization as a user interacts with a site, as well as the ability to change ads via the social stream. In one case, as someone types in a ZIP code on Google Maps, a rectangular display ad next to the typing is customized to that region. Other ads, some of which exist today, allow companies to put live Twitter streams and comments into a banner.

This means publishers will have the chance to make money from their visitors by enabling them to interact with ads in the same way they are now encouraged to interact with a site’s main content. (Publishers still will have to maximize revenue for each ad placement by serving the highest-value ad in each spot and by creating other revenue streams.)

As marketers become more savvy and demand more proof of user engagement, publishers will likely have to offer marketing formats that show clients that they have gotten users to engage not only with the site, but also the brands that are advertising on them.

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