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Online Advertising Industry Background

The Internet advertising industry is still in its early phases of development. There are ongoing structural shifts and some consolidation is taking place. Online advertising only really began in any significant way in 1995, and most of the industry's norms, standards and policies have been established in the past two years and continue to evolve. The advertising industry obviously grows along with Internet activity as a whole, and acts as one of the underlying economic linchpins for the evolution of that activity. The easing of initial concerns over the security of credit card transactions as well as the development of tens of thousands of consumer-friendly and professional websites have aided in spurring worldwide use of the Web forward. The Internet has become a mainstream means of doing business and communicating more generally. With this said, global penetration rates remain relatively low with North American homes and businesses on the leading edge; an estimated 30% of Americans access the Internet, while in European countries, for example, these penetration rates hover closer to 5% to 20%. According to Forrester Research Inc., within five years there will be significantly higher penetration rates, a much greater capacity to deliver video over the Internet, and worldwide e-commerce sales of US$3.2 trillion (approximately 5% of all global sales).

In the United States, US$650 million dollars were spent on advertising on the Internet in 1997. US ad spending on the Internet reached $2.0 billion by the end of 1998. Again according to Forrester Research Inc., online ad spending is projected to reach $10.5 billion by 2003 in the United States alone, while global online advertising will hit $15 billion. Interactive advertising may well be destined to be the pre-eminent form of advertising in the future in that it can be targeted to user profiles much more efficiently than any other media including broadcast, cable or newspapers.

"The Internet has arrived as an accepted advertising medium", says Bill Bass, a Director at Forrester. "This is evidenced by the amount that will be spent for on-line ads during the next five years, as well as by the arrival of large mainstream advertisers."

There are two primary pricing models currently used to charge advertisers for ads distributed on host web sites around the world through an ad network. One model is payment on a cost-per-click (CPC) basis. A click is registered when an Internet user views a banner on a web site and then clicks on it to find out more about the advertisement. The other model is payment on a cost-per-thousand (CPM) basis, whereby advertisers pay a given amount for every one thousand impressions (each time an ad is seen, one impression is registered).

In regular media such as TV and print, the CPM is based on the value of the demographic audience of the show or readers of a magazine and the reach of the TV show or magazine. On the Internet, CPM is also based on the value of the audience and on the reach of the website, but unlike regular media, the reach can be precisely determined (by counting the number of banner requests) and more sophisticated tracking systems can pinpoint the value of the audience.

The appeal of Internet advertising lies in its targeting precision as well as its ability to deliver immediate purchases. As an advertiser, if you reach your intended audience directly through a highly-focused delivery mechanism then your ad dollars are well spent and not wasted as naturally occurs with regular media; you therefore pay more for highly-targeted advertising on a per user basis. In traditional media, the audience-quality measurement is based on surveys and demographics, and a significant percentage of the people that view these ads has absolutely no interest or use for the products in question.

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