In the earliest days of the World Wide Web, advertising was one of the first revenue models adopted for use in the new medium in germany. The implementation and understanding was directly adopted from traditional offline media. Advertising was almost exclusively sold in a CPM model, with little understanding or use of some of the advanced analytic and targeting capabilities unique to the web.
As in any brand-new market that is not yet well understood, there were not yet any proven business models that could be followed, so many early web-based companies defaulted to adopting an advertising-based approach. The concept of audience composition and targetability was not well understood by a lot of organizations, so the resulting business plan consisted of one simple idea: “attract large amounts of traffic, then show as many banner ads as we can”.
During this phase, most web applications that were developed were viewed merely as simple sources of traffic, which can then be monetized via banner ads. Valuable behavior and intents inherent to the different applications were ignored. Even web search, which currently rules as the most lucrative web service, was treated only as a count of page views and corresponding banner impressions.
Interestingly, the founders of the current reigning search champion, Google, were discouraged from pursuing what at the time was considered “just another search engine”. When Larry Page and Sergey Brin were developing their engine at Stanford University, the market was already saturated with search engines. There was a common perception that the search problem had already been “solved”. Search traffic was being monetized as poorly as any other traffic, and in fact was looked down upon by several of the larger portals. It was well understood that when people used search engines, the end result was them leaving your site to go somewhere else. Portals were much more interested in keeping the users in their network of sites. It wasn’t until the development of paid search several years later that search began to be viewed as a viable business.
As a side note, some search engines, MetaCrawler and Dogpile among them, did have at least a primitive understanding of the potential added value from the interests expressed in search queries. As an advertiser, you could purchase banner impressions on the search results pages for certain keywords. Not quite paid search, but it begins to hint at the promise therein. It is unclear how successful the practice was, but as it’s not in widespread use today, it was clearly overshadowed by the idea of paid search listings.
The limited understanding of the potential of online advertising wasn’t the biggest obstacle preventing it from being use successfully on a large scale. For several years, the advertising dollars to support a large market simply weren’t there.
Many traditional offline advertisers were slow to adopt the medium. It was so new that it wasn’t well understood. Also, until internet usage became mainstream, marketing dollars were better spent elsewhere, on traditional media channels. As a result, much of the advertising spend that was available was somewhat unstable, a large portion of it consisting of start-up dot-coms that were spending their venture capital in an effort to get their name out there, so they could reach critical mass. (In early 2001, Yahoo! derived 40% of their income from small dot-com advertisers.[i]) When many dot-coms began to go bankrupt and close their doors in late 2000 and early 2001, a significant chunk of the total existing online marketing spend dried up, as can be seen in Figure 1.
During this time, investors began to question the viability of an advertising-based strategy for online ventures. As the largest primary ad-supported entity, Yahoo! became the poster child for many tough questions, as many people began to doubt the viability of their business.
In response, Yahoo! (and many others) attempted to transition some of their business to a paid subscription model.[ii] Some services were able to make the transition quite successfully. A good example is web hosting. In the late 1990’s, many companies offered to host websites for free, in exchange for the hosted site displaying banner ads for the host provider. As the advertising dollars from the struggling dot-coms began to falter, the costs (primarily hardware, maintenance, and bandwidth) quickly outran the already minimal revenue. Many of the users of these services were eager to pay nominal monthly fees, usually around $10, for slightly improved hosting packages (more disk space and bandwidth allotment), and to get away from the banner ad requirement. As the number of paying users increased, the free hosting services could be phased out.
Unfortunately, for many services, and most content-based sites, the public proved unwilling to pay for what they previously enjoyed for free. Due to the ubiquity of the free-content-via-advertising model in the offline world, it was difficult to convince users to subscribe.
As it turns out, it wasn’t long before the advertising model truly did become feasible for online businesses. Due to several important factors, including the development of paid search and the continued slow adoption of the medium by traditional offline advertisers with deep pockets, the market experienced somewhat of a renaissance.