Online advertising

Overview

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The online advertising ecosystem has significantly evolved over the years to reflect the intricate expansion of the Internet. Today, the online advertising ecosystem is more than just an exchange of advertisements and money — it is an exchange of information that continues to grow as more users access the Internet and either knowingly or unknowingly share their personal data with an attentive and vibrant online advertising market.

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The online market potentially offers major opportunities for advertisers. Smaller businesses can place their ads in front of millions of people at a low cost. Technology makes it possible to measure the effectiveness of ads by counting the number of consumers who click on online offerings or watch online videos. Cell phones and other mobile devices give advertisers more access to more consumers for more hours of the day.

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Online advertisements may appear to be part of the host website that a user visits, just like images in an article online, but they are different in several important respects. First, and most crucially, the advertisements delivered through ad networks are generally not under the control of the host website at the time of delivery. The ads usually do not physically reside on the same server as the main content of the website. Second, while an advertisement in a newspaper is just a static picture, online advertisements can deliver files and whole programs to a user even if the advertisement itself appears to be just an image."

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In online advertising's simplest form, a commercial website rents out "space" on its site to another website which places a hot link banner advertisement in that space. The banner ad, when clicked, sends the user directly to the advertiser’s website. In this scenario, no matter who visits a particular website, that user will see the same advertisement, regardless of whether he/she may be interested in that product or service. However, many advertisers will pay a premium for the increased likelihood that users viewing their advertisement would be interested in the product or service offered. As a result, technology has developed to more accurately target online ads to the desired audience.

Companies have increased ability to fine-tune ad strategies, with many now buying and adjusting media on a weekly or daily basis, rather than at set intervals during the year. Firms can also directly tout their products online, which has helped spur growth in so-called below-the-line marketing such as corporate websites, blogs, and e-mail solicitations. Below-the-line marketing appears to be crowding out some above-the-line spending, the term generally used to refer to media-based advertising.

Despite the myriad websites and blogs, the online market is compressed. The top 10 ad-selling firms accounted for 71% of total online advertising revenues in the second quarter of 2009. Search advertising alone accounted for 47% of digital ad revenues in the first half of 2009.

At the same time, the vast proliferation of ad-supported websites, online videos, blogs, and other offerings has created more supply than can be readily sold, helping to depress advertising rates in both online and in conventional media markets.

Advertisers also are discovering that it can be challenging to connect with online consumers, who have more power to screen content via pop-up blockers, digital recording devices, and other technologies.

Use of cookies

Most online advertising providers monitor individual Internet users by placing a "persistent cookie" on that user's computer. "Persistent cookies" reside on a hard drive indefinitely, unlike most “cookies” which expire when a browser window is closed. Generally, online advertisers give the "cookies" they place on user computers a unique alphanumeric code that identifies that user to the advertising company purportedly without revealing any personally identifiable information. "Cookies" may be placed on an individual's computer when an individual visits a website affiliated with the online advertisement supplier; however, the exact moment of "cookie" placement may be different when the relevant advertising partnership is between a user's Internet Service Provider (ISP) and an online advertising provider.

Once the cookie is in place, it gathers certain information related to that user's online activity on a continuous basis and relays that information to the online advertising provider. The advertising provider assembles that data into an individual profile that is then used to target advertising to that user's interests. This process is ongoing, but, in general, the user may opt out of continued monitoring at any point, assuming they are aware that it is occurring.

In most types of behaviorally targeted advertising technology, the advertising firm gathers information about user activities on websites that are affiliated with the advertising firm. The behavioral advertiser DoubleClick, for instance, operates on this model. Information on individual users is transmitted to DoubleClick by DoubleClick’s clients. In a newly emerging behavioral advertising model, the advertising provider is attempting to partner with the users’ ISP. This partnership will presumably grant the advertising provider access to all web activity in which an ISP's subscribers engage.

Both of these types of potential partnerships raise a number of questions regarding potential violations of existing privacy protections in federal law.

Measurements

In the digital world, advertisers have access to faster, more granular measurements than do traditional media. Digital advertisers can count the number of people who click on an ad, forward an email or view a video. "One of the primary benefits of digital advertising is that it lends itself to quantitative analysis. Companies can easily track ad impressions, click-throughs, unique visits and time spent on each page. Drawbacks of online advertising are that ... many consumers ignore passive ads, in part because they often had no relevance to what the consumer was viewing."

Most online ads are sold on the basis of consumer response. According to the IAB, 38% of online ads sold in the second quarter of 2009 were priced on cost per impression (the number of times viewers saw an ad), with 58% sold on a performance-based model such as cost per click. The rest were sold on a hybrid basis.

There are questions as to the accuracy of such metrics. comScore, a leading U.S. firm measuring consumer digital behavior by tracking behavior of a million U.S. consumer volunteers, says only about 16% of Internet users clicked on an ad in March 2009, and just 8% of Internet users accounted for nearly 85% of all clicks.

Another ongoing problem is click fraud, a practice whereby companies or individuals manipulate the numbers to make ads look more popular or to draw clicks to their websites and away from competitors.

Government regulations

Congress and the courts have regulated advertising to protect consumers and ensure fair competition. U.S. laws govern, among other things, alcohol advertising, tobacco advertising, advertising by mail, advertising by telephone and commercial email or spam.

In addition to Congress, the advertising industry is monitored by a variety of federal agencies.

• The Food and Drug Administration (FDA) is charged with ensuring that certain product claims are truthful and detail the possible side effects of major drugs. The agency enforces the Federal Food, Drug and Cosmetic Act, looks at food package labeling and health claims.

• The Federal Trade Commission (FTC) is the main regulator of products sold in interstate commerce, and is charged with protecting consumers from claims that are misleading or unfair. The FTC is looking at issues including Internet privacy, as businesses and marketers develop sophisticated tools for tracking consumer information. The FTC’s authority to regulate online advertising under other statutes tends to be for very specific types of data. The most prominent examples include:

• the Children's Online Privacy Protection Act (COPPA)
• the Fair Credit Reporting Act
• the Gramm-Leach-Bliley Act
• the Health Insurance Portability and Accountability Act of 1996
• the Cable Television Consumer Protection and Competition Act, and
• the Health Information Technology for Economic and Clinical Health Act.

• The Federal Communications Commission (FCC) is an independent agency that regulates radio, television, telephone, satellite and cable television and the Internet. The FCC is looking at the growing use of product placement, or embedded advertising, in programming and is taking a new look at children and the digital media landscape.

Self regulation

The advertising industry has its own, parallel regulatory structure. The National Advertising Review Council ("Council") was formed in 1971 as alliance by the Association of National Advertisers, the American Association of Advertising Agencies, the American Advertising Federation and the Council of Better Business Bureaus. The Council seeks to ensure that adverting is factual and accurate through a compliance system that includes recommendations for corrective actions and an internal appeals process.

The Council also sets policies for the National Advertising Division (NAD) of the Council of Better Business Bureaus and the Children's Advertising Review Unit (CARU). The bodies look into specific complaints regarding possibly inaccurate product claims, and more general questions about whether certain advertising is appropriate, particularly for children. The Council is overseeing an initiative on electronic advertising, and a set of principles for online behavioral advertising.

The Interactive Advertising Bureau (IAB), founded in 1996, has been developing rules of the road for emerging online businesses and advertisers. The organization is a coalition of more than 375 media and technology companies that sell nearly 90% of all U.S. online advertising. The IAB includes such firms as Google, Disney, The New York Times, Yahoo!, and Microsoft.

One of the IAB's self-described goals is to fend off intrusive legislation. In that vein, it worked with other advertising organizations to craft voluntary guidelines for behavioral advertising, which were released in the summer of 2009. The IAB has also set guidelines for advertising in social media like Facebook and on mobile platforms, such as cell phones, iPhones and hand-held readers. It has tried to standardize online advertising, issuing definitions for terms like "click" and "impression" as well as ad sizes and use of techniques such as pop-up ads.

Source

• Advertising Industry in the Digital Age, at 22-23.

See also

• Keyword advertising
• Online behavioral advertising
• Targeted advertising