Internet Advertising

This page is primarily about the structure of the online advertising industry. See internet marketing for tactics used to advertise online.

The Internet and the Advertising industry

According to an article in the New Yorker, Google's advertising revenue is approximately equal to that of the four national television networks combined (Auletta 2008. See footnote on Search Engines page).

Where's the Money?

Publishers charge advertisers on the basis of cost per thousand impressions (CPM — cost per millie) or on the basic of Pay Per Click (PPC). CPM rates fell in late 2008.

How Internet Advertising Works

People who have web sites are called web publishers. They have space on their pages for advertising, called inventory or "real estate". Publishers can sell this space to advertisers. Publishers who have many web site viewers can charge higher prices. As in real estate, it's all about "location, location, location."

Sometimes advertising space is sold directly to a firm that wants to advertise (like Nike, for example). But often firms and publishers use an intermediary- an online advertising firm such as DoubleClick. Then the publisher sells the space through DoubleClick, and DoubleClick "serves" the ads to the page. That is, DoubleClick's computers will send an advertisement to the page each time someone opens the page. iMedia is an online marketing magazine with information on ad serving productions and services.

Web hosting companies such as Verio provide a useful introduction to internet advertising.

Online Advertising is More Data-Driven

Online advertising provides faster feedback.


Web sites frequently track users' browser behavior. That information is used by advertisers to target ads. The industry say that is one reason many web sites are free. But the Obama administration is considering limiting the use of web tracking.


Every time you click on a link a web server "serves" you a web page. "Static" web sites serve everybody the same page. But many web sites serve different pages to different people, depending on login data they have entered or a user profile developed from behavioral tracking.

Ad serving allows personalization. Different ads can be served to the slot based on the time of day and the location of the viewer. If the web site knows who you are the ad server can serve you an ad tailored to your interests. Many web sites build a profile of your interests by tracking your behavior on the web.

Many web sites require you to register and log in, even though their services are free. Examples include web mail services such as Yahoo! and gmail and media sites such as the New York Times. That allows the sites to identify you and to serve you with customized content.

Unlike print media, internet sites can constantly change the appearance of display ads. Firms are now experimenting with many different ad designs and measuring to see which ones are most effective.

Personalization can include real-time advertising, in which the ad changes immediately depending on who is looking at the site

Advertising Networks

Many web publishers are members of advertising networks. These networks are managed by companies such as Google, AOL and DoubleClick (and many others). Publishers who are members of networks collect behavior of their users online across multiple sites. The networks can "serve" ads to users based on their interests, anywhere across the network. Ads can follow users as they surf the web, so a user sees the same message at different sites.

Many web sites know a lot about you from the search terms you type in and the pages you access. They use this information to form a profile of you, which they then use to target relevant ads.

This site is a member of Google's AdSense network. I have "real estate" on the site that I'm prepared to make available for advertising. Google serves ads to the site based on the page content, and tries to make the ads relevant to the people who would access that page. Advertisers pay the site owner for the use of the site's real estate. In this case payment is mostly per click, but sometimes CPM (cost per thousand impressions). Google acts as the "middle man" or matchmaker between the advertisers and the web site owners.

Many brand name web sites are members of advertising networks.

Internet advertising networks are reportedly pushing ad rates down.


There are many pricing options for online ads. The price depends partly on placement. "Run of site" ads are placed on every page on the site, regardless of who is accessing the page. Targeted ads are served to users with specific profiles, such as those that click on the sports page or who have a particular behavior profile. Ads targeted at specific users are more expensive, but should produce a higher conversion rate. Some typical pricing options include:

  • Cost per impression (CPM) - cost per thousand page views
  • Cost per click - advertiser pays every time someone clicks on an ad
  • Cost per conversion - advertiser pays only when the customer buys something
  • Flat rate e.g. $10,000 per month

Prices are negotiated depending on regions, demographics, ad size and location and other factors. Here's an example of some online advertising rates.

Google's search engine ads are priced at an online auction. Advertisers bid for "slots", with the top slot awarded to the advertiser who bids the most, and so for the next two. Then the slots at the side are auctioned, with the next highest bidder getting the top slot. Because there is a limited number of slots, competing bidders can push the price of slots up significantly. You can see estimates of the cost per click in Google's AdWords Traffic Estimator. Here are some real-life lessons from using AdWords.

Adbrite is an online advertising marketplace. They list prices for popular sites, including dating sites.

Advertisers can target by country and designated market area (DMA).


Online video ads are still growing, but conventional television content is being challenged by user-generated content according to a 12/16/08 article in the Wall St Journal. The article quotes a Unilever marketing executive who says that he is moving more advertising spend to digital from TV. They want to go where the viewers are.

Email Marketing

Here's a webinar on email marketing sponsored by Verio.

Market Size

Online advertising was about a $21 billion industry in 2007. One forecast expects the market to double by 2011 but some analysts expect the market to quadruple to $80 billion. This represents 9-13% of total US ad spend.

An April 11, 2008 Wall Street Journal article showed Google with a growing share (currently 30%) of the online advertising market. According to the article, eMarketer expects an online ad spend of about $26 billion in 2008.

Cellphone Advertising

According to an article in the May 2008 edition of Fast Company, cellphone advertising "is expected to rise tenfold by 2011, to $14 billion."1

more to come here

Industry Participants

Large advertisers often work with advertising agencies such as Young & Rubicam or J. Walter Thompson. These full service agencies can coordinate online campaigns with offline campaigns such as television advertising.

Small advertisers can deal directly with firms such as Google, Microsoft's MSN, Yahoo! and AOL. They can handle the whole transaction online.

This is an interesting Google blog post from June 26 2007, where a Google exec explains why they're buying DoubleClick. The writer, Alex Kinnier, gives an overview of how the online advertising market works.

There are many specialized firms. Email marketing firms can provide lists of valid email addresses and help advertisers to develop html email ads and newsletters.

There's a lot of merger and acquisition activity in this space. Some observers say Microsoft's bid for Yahoo! is about display advertisements (as opposed to search ads).

Google - with a product called Ad Manager - has (as of March 08) entered the market of serving and tracking ads developed by web publishers.

Microsoft bought a company called Rapt in March 08. Rapt helps web publishers optimize how they package and price display-ad space.

Now internet service providers are collaborating to serve targeted ads to users.

Adify bought by Cox Enterprises - 4/29/08 WSJ article.

Industry Stats

Comparison with Offline Advertising

According to one article in February 2008, marketers are starting to find television less effective.

Key Terms

  • Cookies
  • Conversion tracking software
  • Word tracker
  • IAB ad specifications
  • IAB
  • Dart for advertisers
  • 247 ad serving
  • Ad serving


Thanks to Han Huang of Counterpoint Analytics and Marten van Pelt of Accenture for generously sharing their expertise in online marketing. All errors and omissions are the responsibility of the webmaster.

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