Online ad market reaches turning point

Alan Lau/McKinsey
19 Oct 2011

Recent reports on online advertising indicate a turning point in the industry. US internet ad spending last year exceeded that of newspapers for the first time, reaching $26 billion with half of this revenue coming from "search ads". But display ads are growing twice as fast and now make up 40% of total US online ad spending.

The real surprise, however, involves predictions about Asia Pacific. Agencies expect online advertising in the region to overtake Europe by 2016, and reach 80% of US level in five years. Compared to a few years ago, advertisers now recognize the reach of the internet and the deep engagement of users who spend hours on the internet every day writing emails, watching videos and participating in social networks. Advertisers, especially those interested in building brand awareness that goes beyond simple "calls to action", are now embracing online display ads as a medium to get their message across.

Overcoming the hurdles

We believe online advertising has reached a turning point as key hurdles to its mainstream acceptance fall.

On the supply side, in driving reach and creating better inventory, web publishers in Asia are following the proven US playbook. To bring in audiences, sites have optimized how they use search engines and social networks, and mastered how to create better ad inventory through analytics and traffic segmentation. They are also getting better at engaging users with frequently refreshed content, and making it easier for them to share content via the now-ubiquitous one-click social network buttons. As evidence of online advertising's appeal to marketers, the most popular websites now enjoy viewing rates equal to those of traditional TV.

On the demand side, compared to a few years ago, it is also much easier to place online display advertising. Ad exchanges from Yahoo, Google and others are making it simpler for agencies to buy what they need, rather than accept "bundles" of ad spaces with less targeted user demographics. The real-time bidding (RTB) approach of ad exchanges also adds transparency to advertising rates for both buyers and sellers.

That said, some hurdles still remain to online ad adoption. For example, effective performance measurement remains less well established compared to traditional media. But many players are working to solve the problem. For instance, Facebook has been working with Nielsen and major brand owners to study Facebook's ability to drive up metrics such as brand awareness online and compare the results to newspaper or TV campaigns. Sites such as ComScore are creating standards to measure advertising impact while web publishers are investing in their own analytics capability to create reports for their advertiser clients.

Video & mobile formats

Of the different online display ad formats available today, video and mobile formats have grown the fastest and as a result garner the most interest. But both require advertisers to take a different approach to create the most impact.

Take online video. Marketers have learned to treat online video ads differently from traditional 30-second TV spots because an online ad is often half the length and most have a strong viral element to them. The best campaigns also succeed in having more than passive viewing and engage users far more than simple pre-roll or post-roll video ads. For instance, the wildly successful Tipp-Ex YouTube campaign, which enables users to choose what the next video scene will be as the story unfolds, captured a million views after 36 hours and a total of 43 million views. More importantly, sales after the campaign were up 30% from a year earlier.

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