The Future of Web Advertising

If you want a glimpse of the future of advertising, you can hire a consultant — or you can travel to Britain.

Online advertising is racing ahead in Britain, growing at a roughly 40 percent annual rate, and is expected to account for as much as 14 percent of overall ad spending this year, according to media buying agencies. That is the highest level in the world, and more than double the percentage in the United States.

There are big differences between the advertising markets in Britain and the Unites States. In Britain, much of the advertising is national, while there are strong local and regional ad markets in America. Still, some believe that online advertising in Britain provides somewhat of a roadmap for where online ads in the United States and elsewhere may be heading. “The U.S. is so behind,” said Terry S. Semel, the chief executive of Yahoo, in a recent speech in London. “It’s certainly lagging the U.K. by at least a year or two.”

More than their American counterparts, British marketers seem to have bought into the oft-touted benefits of Internet advertising: that it is easy to track, enormously effective and a relative bargain. In Britain, as Internet ad spending surges, the overall advertising pie is not growing much at all, and traditional media are the ones losing out.

However, British media are nearly all aimed nationwide in contrast to the United States newspaper and television markets, where local and regional markets are big players. These local markets in the United States have, so far, been slow to move ad money online.

As recently as 2002, many British advertisers were reluctant to go online, too. That year, British advertising online was 1.4 percent compared with 2.5 percent in the United States, according to the Internet Advertising Bureau in Britain and the Interactive Advertising Bureau in the United States. Each bureau tracks online ad spending in their respective countries.

In the following year, Britain overtook the United States, and it has not looked back. In 2005, nearly 8 percent of British ad dollars went online, compared with 4.6 percent in the United States. And, this year, the two bureaus say, the Internet will account for 10.5 percent of British ad spending compared with 5.6 percent in the United States.

Media buying agencies like Group M, the media-buying division of WPP Group, estimate that online ad spending in Britain will be even higher — close to 14 percent of the total this year.

Similarly, broadband access in Britain at first lagged access in the United States, but has since surged. In 2002, 15.7 percent of American households had broadband compared with only 5.1 percent of British homes, according to eMarketer. This year, Britain is ahead, with 47.4 percent of homes having broadband, which is more than the 43.9 percent in the United States.

Some analysts say British advertisers may simply be quicker to embrace new marketing ideas than American companies. “I’d like to think there’s a cultural factor in the U.K., where we’ve been a bit more experimental on some of these things,” said Rob Noss, European chief executive of MindShare Interaction, a new media division of Group M’s MindShare unit.

In the United States, major advertisers are more dependent on traditional media, particularly television. The top 50 advertisers in the United States spent just 3.8 percent of their budgets in the first half of this year on online ads, excluding search-related advertising like that sold by Google, according to data from TNS Media Intelligence.

“Partly driven by scale but also by legacy, there are a lot of traditional budgets that are already laid down,” said Antony M. Young, president of the American division of Optimedia, a media-buying unit of Publicis Groupe.

Ad buyers at the major American brand companies may be reluctant to commit larger sums to the Internet because they believe they do not have control over where their ads appear, analysts say. Many Internet advertisements in the United States are still sold through online networks that place ads on member sites. In Britain, more advertisers work directly with Web publishers, giving them greater say in where and when ads appear.

In contrast, large advertisers in Britain appear to be leading the push onto the Internet. British financial-services companies have been particularly aggressive online spenders, in some cases allocating 30 percent or 40 percent of their advertising budgets to the Internet, Mr. Noss said.

Big British advertisers have also been quick to jump at the opportunities provided by paid search advertising, like that sold by Google and other search engines. Search accounts for 56 percent of Internet ad spending in Britain, compared with 42.5 percent in the United States, according to the Internet Advertising Bureau. “We’re all searchaholics,” said Guy Phillipson, chief executive of the bureau’s branch in Britain.

Since retailers in Britain typically operate nationally and deliver online purchases anywhere in the country, searches often lead directly to sales, said Andrew Edwards, European president of Arc, a direct marketing agency affiliated with Leo Burnett. About 3.9 percent of visits to British online retailers’ sites yield purchases, compared with 2.5 percent of American site visits, according to Coremetrics, an e-commerce tracking service.

In Britain, analysts predict that it will not be long until Internet advertising catches up with TV advertising. Group M, for instance, says the Internet could account for 25 percent of British ad spending by 2010. That would place it ahead of television, which accounts for just more than 20 percent now.

Hardest hit has been Britain’s biggest commercial broadcaster, ITV. Analysts at Numis Securities estimate that ITV’s advertising revenue will fall 13 percent for 2006. Weakened by its loss of advertising, ITV has become a takeover target.

On average, Britons spend 23 hours a week on the Internet, according to the Internet Advertising Bureau. The Internet accounts for about a quarter of Britons’ time spent with all media, according to Citigroup, nearly double the percentage in the United States. Americans use their computers an average of 14 hours a week, according to Nielsen Media Research.

TV advertising has held strong in the United States, where about $72.56 billion will be spent on TV ads this year, according to Universal McCann, which is part of the Interpublic Group. That represents a quarter of all ad spending, and that proportion has held roughly steady since 2000.

Local advertisers in the United States have been slow to move money online. This year, for example, local spending on online ads in the United States will be $1.3 billion — or 8 percent of all Internet spending, according to eMarketer. But local ads make up a little more than a third of overall ad sales in the United States.

Ad executives said American TV networks were unlikely to lose as much ground as British networks had. “TV’s just too important for our society,” said Martin Reidy, president of Modem Media, which is part of Digitas. “I don’t think the Internet will ever surpass it here.”

In Britain, the growth of Internet ads seems to be bringing down the amount of money spent in the overall advertising market as well. Growth in spending on advertising and marketing services is set to slow to 0.3 percent this year, according to Group M, after growth of 4.3 percent last year and 6.7 percent in 2004. To many ad executives, this makes sense: online ads are generally much cheaper.

“Every pound withdrawn from traditional media either to be saved or spent online, where supply is in handsome surplus, exerts more deflationary pressure on the total market,” said Group M in a recent report on the British ad market. “And if online proves more productive, advertisers have the option of investing less.”

Source: NYT