Your Ad Here? Why Bother

Does Internet advertising work?

"Yes," says Tim Koogle, Yahoo!'s (YHOO:Nasdaq - news - boards) CEO.

That doesn't do it for you?

Wall Street, too, remains unconvinced. But if anyone should know about the efficacy of Net advertising, Koogle should. His firm took in some $270 million in Internet advertising last quarter. And yet these days, Internet business models based on advertising revenue are suspect on Wall Street. Content Web sites, once Wall Street darlings, have seen their shares pummeled. Private Net companies with advertising-based models are having great difficulty finding venture capital funding. And last week, Yahoo! itself was battered over concerns that advertising revenue was at risk.

When Lehman Brothers analyst Holly Becker issued a caustic report saying that Yahoo!'s advertising had slowed for the summer and wasn't likely to come back, the stock fell 9%. This was, in large part, because Becker's warning fed Wall Street's existing anxiety about Internet advertising. (The fact that Lehman was a Yahoo! underwriter lent even further credibility to the negative call.) Never mind that in the details of Becker's note, she is merely readjusting her revenue estimates. This brings her in line with other analysts, dropping her earlier bullish stance to a more mainline $275 million. And never mind the fact that last June she caused a similar disruption in Yahoo! shares, predicting that the company would not exceed Wall Street estimates in its second quarter (handily, Yahoo! beat them). But bigger issues remain: Does Internet advertising work? And will Wall Street ever buy it?

Yahoo's Ad Impressions Slowed Dramatically In July

Source: Source: Nielsen/Netratings, Lehman Brothers

There's little doubt that the advertising market this quarter is tough. Summer is always slow for media companies. And this year the added distraction of the Summer Games has slowed most advertising not resting on the laurels of Michael Johnson and his Olympic brethren.

But there are two questions plaguing Yahoo! -- one big, the other small. The small question is whether or not the slowdown in the Internet economy will have a crippling effect on Yahoo!'s third-quarter earnings. Thomas Weisel Partners analyst David Readerman says that last year, all advertising -- online and off -- grew at about 8.7%, but that it now appears to be slowing back to the 7.5% growth rate of 1994 through 1999. "That slowdown is a real concern for Yahoo!," says Readerman. "Is this going to be a tough quarter for Yahoo!? Yes. But is there any reason to lower estimates here? I don't see one."

Yahoo! added fuel to that concern when it introduced a new metric on its July 11 conference call discussing second-quarter earnings. On that call, Chief Financial Officer Susan Decker said that only 10% of the company's advertisers were "at risk" dot-coms. And while at least a few of the other 3,308 companies advertising on Yahoo! might also cut media buys this summer, Yahoo! boasts 29 of the Fortune 50 as advertising clients.

If bricks-and-mortar companies are going to advertise anywhere on the Internet, they're probably going to go for the largest global audience on the Web -- and, according to Nielsen/Net Ratings, with 66 million people, that's Yahoo!.

"It was true with broadcast, and it's true with our industry," says Koogle. "There is a lot of concentration of the spending of those who have the largest audience and those who have the ability to target. And in the broadcast world that ended up being a small number of network players who were the strongest and the largest. And I think in our industry for a short list of global brands and networks that gets a concentration of dollars."

But for Wall Street, the bigger question remains: Does any Internet advertising really work? "If you look at the fundamentals of this medium in the context of delivering advertising, it has more capabilities than any other medium that has ever existed before," says Koogle. "It's interactive, it's measurable and it's a mass market -- that's been true for some other media as well -- but all of those things added up are fundamental. Then it only comes down to the individual players who enable advertising, whether or not they bring a large audience, and they bring fundamentally the ability to target and the technology platform to deliver."

The problem for Yahoo! is that Wall Street is still licking its wounds after the selloff in technology stocks in the spring. So it isn't willing to accept anything as an article of faith right now. Anheuser-Busch (BUD:NYSE - news - boards) might know that millions spent on talking frogs will lead to hundreds of millions in Budweiser sales. But the intuitive logic of advertising seems like a stretch to Wall Street, especially with investors leery of Internet stocks.

Worse still, the very quantifiable nature of the Net is also giving investors some pause. After all, a failed ad on TV disappears into the ether -- it might even seem like a success if it gets Survivor-like ratings. But a failed Internet ad that doesn't generate clicks is instantly identified as a loser. Those ad dollars get pulled and that's why Wall Street is wary.

"I have a buddy in ad sales for a dot-com," says Howard Love Jr., of Burlingame, Calif.-based Love Capital Management hedge fund, "and he says he's quitting. He says, 'The problem isn't that it's measurable, it's too goddamn measurable.' So he's going back to print."

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Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. Johnson also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send it to Cory Johnson .

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