Are Online Ads Losing Value?Are Online Ads Losing Value?

For an industry that saw its revenue rise 25% last year to a record high, the online advertising business is in a bit of a funk. Mostly that's because of Google, which has seen its dominance in Internet ads erode, slightly, and watched its share price slide by 38% in the last four months.Google is seeing growth in its click-through rates -- the frequency with which consumers click on the paid text ads that appear next to search results -- slow or flatten out, a development that has Wall Street afraid that the wider economic slowdown could affect the pre-eminent Internet growth company.

The Interactive Advertising Bureau (IAB), which just wrapped up its annual convention in Phoenix, said that online ad revenue reached a record high of more than $21 billion in 2007, but even that news was mixed. Revenue growth from online ads slowed to 25% from 35% the year before.

What's more, the IAB, hoping to ward off government regulation, has released a new set of guidelines to offer stronger protections for consumer privacy on the Web, specifically limiting the ways in which advertisers and publishers collect personal data as behavioral ad targeting becomes more and more prominent.

The slowing of the online advertising boom, such as it is, reflects several wider developments: the prospects of a recession, the inevitable braking of Google's amazing growth run, the ongoing transfer of print-media ads (which carry slower growth rates) to the Web, and so on. At the back of online marketers' minds, though, lurks a nagging question: Just how effective is online advertising, anyway?

Back in the tech crash of 2001-02, many marketers had become convinced that banner ads don't work. Google's remarkable rise since then has indicated that "contextual advertising" -- paid text ads for digital cameras alongside the results of a Google search on "digital cameras," for instance -- are, by contrast, highly effective.

If Google's click-through rate continues to decline, however, that argument inevitably loses weight. There's a chance that the novelty of online ads is wearing off -- that consumers, increasingly sophisticated about what's an ad and what's "real" on the Web, will gradually stop clicking on as many paid-for links. Many people I've talked to, in fact, won't click on anything that smells like an ad on the Web, for fear of either wasting their time, being sent to a porn site, or somehow having their personal information and surfing habits sent to Malevolent Corporation Inc., which will then proceed to send them a lifetime of erectile-dysfunction and Hot Stock Tip! spam.

It's interesting that much of the research on online advertising is either outdated or paid for by the online ad business directly or indirectly, or both.

Now a raft of companies like Glam Media and Circos.com are attempting to improve the effectiveness of online ads by linking them more tightly to the user's habits, preferences, and affinities like social-networking relationships. Google itself has taken steps to reduce the "noise" level in its ad click-throughs, making it harder to click on ads accidentally, for instance.

The Nielsen Co., which pioneered the business of providing data on people's TV watching habits, is trying to collect a more comprehensive range of data on consumers' media-consumption habits -- and it's running into strong resistance from its potential subjects.

All of this doesn't mean that online ads are going to go Pfft! in an economic slowdown. The Kelsey Group predicts that Web advertising revenue will reach $147 billion by 2012, more than 20% of total ad sales worldwide. It does suggest that assumptions about consumer behavior online need to be challenged -- as do the more buoyant predictions about unlimited growth in online ad revenue.