It's not just the economy, stupid.

Image placeholder title

Sure, the shaky business outlook is making it difficult for ad-supported Internet companies to forecast their financial performance for the rest of the year, say advertising industry executives. But something else makes it harder to get a sense of when the online advertising market will turn around, they say: the feeling that agencies and advertisers got burned by previous ventures into Internet advertising.

Comments of these ad executives address a crucial theme articulated by Internet media companies in the first quarter of the year: a lack of visibility. Though Net companies were once able to predict with confidence how business would go for the next two quarters, companies from

Yahoo!

(YHOO)

on down lately have confessed that their outlook is unclear. Meanwhile, people who work at agencies representing online marketers don't see a pretty sight themselves, saying that both the economy and marketers' mistrust are dragging on a recovery.

"It's the cloudiest crystal ball I've ever seen," says Bruce Carlisle, CEO of

SF Interactive,

an interactive marketing services company. "Lack of visibility is a euphemism for 'I don't have any orders.' "

Jawline Recession

Carlisle says 60% of his business was on retainer last year, but the amount of business that's retainer-based has dropped to about 25% this year. "A retainer implies long-term spending plans," he says. "When you have clients who don't have retainers, it means they don't know what they're spending next month." He adds, "This is a real slump."

Mark Grimes, CEO of interactive advertising agency

eyescream interactive

, says online advertising is suffering from a perception that it doesn't work. "Everybody's kind of got a wait-and-see attitude right now," he says. It's made worse by the fact that when marketers do find a way for Internet advertising to work, they don't want to run around and tell their competitors what has succeeded for them.

The reality behind the perception, suggests Grimes, is that companies that had bad experiences with their first forays into Net advertising aren't dying to return. He says his agency is in conversations with a potential advertiser, a consumer audio products company that spent $70,000 on a 30-day campaign -- to end up with only four leads. "Not even sales -- leads!" says Grimes. "Needless to say, they haven't spent a dime since," he adds. "Getting their faith back takes some time."

Books and Covers

The problem, says Elizabeth Bellit, media director at

Euro RSCG DSW Partners

, is that advertising agencies and their clients are judging Internet ads' effectiveness by click-through rates -- that is, how many people who see an ad click on it. "Click through stinks," says Bellit. "It's a horrible way to see if online advertising is successful."

What Bellit says her firm is hearing from clients is that the bumper-sticker-shaped ads known as banners don't work, and that they don't want to buy them -- because of their low click-through rates.

"We're fighting an uphill battle with them to try and teach them how to think about banners," Bellit says. Part of educating clients, she says, is showing them how they can track the behavior of Internet viewers after they've seen a company's ad, enabling them to judge the ad's effect and effectiveness. But there's a problem with that, she says: Often, clients don't have the infrastructure on their sites that is necessary to get useful data. "It takes time and money to put that infrastructure in place," Bellit says. "And most of the time, they're not in a position to make that kind of investment."

Drying Up

These Internet-specific issues come in addition to the obvious economic cloud hanging over all advertising expenditures.

In the newspaper industry, year-over-year advertising revenue trends steadily worsened in the first months of the year, according to estimates by

Deutsche Banc Alex. Brown

analyst Peter Appert. In a late April note, Appert said that first-quarter newspaper ad revenue declined 3.3% from one year earlier, and was trending down to an estimated 5% to 6% year-over-year decline in April. "Clearly, we have not yet hit the bottom of the cycle," wrote Appert.

Things aren't that much better among broadcasters. On April 26, radio bellwether

Clear Channel Communications

(CCU) - Get Report

reported a decline of 8% in first-quarter radio revenue over the first quarter of 2000. Clear Channel not only lowered overall guidance for the second quarter, but also formally withdrew 2001 guidance that it had issued in mid-February, citing "the current advertising environment and lack of visibility into the second half of 2001."

Viacom

(VIA) - Get Report

, with its

CBS

running strong in the network TV horse race, reported 8% higher TV revenue for the first quarter, but its Infinity segment, which includes radio and outdoor advertising, reported revenue down 4%.

Traces of optimism are out there. Deutsche Banc's Andrew Marcus says he believes radio's bottom will be in March, April or May. September radio revenues, he believes, will be up 5% year over year, but he writes that he remains nervous about near-term fundamentals because advertisers are buying at the last minute, thus providing no visibility.

Looking at the overall media market, Allen Banks, executive media director of

Saatchi & Saatchi North America

, says, "I'm hearing some signs things are loosening up a little bit ... I still don't think it's something I'd take to the bank."

Confidence

And yet economic difficulties are likely to hurt Internet expenditures more than traditional media buys. Advertisers have a better sense of what it means to advertise in television, radio and print, Banks says. "They're still trying to find their way out in the Internet world," he says. "For those who don't have that feeling of confidence in what they're doing, my suspicion is that will be one of the first things that will be cut in a down market."

So what can bring a down Internet ad market back to life? Maybe more market-bolstering moves by

Alan Greenspan, or maybe a major online advertising buy from a major advertiser, says Nancy Preiss, head of

Campaigns That Work

, a marketing services firm for Internet-based businesses. "A lot of it is cheap psychology," Preiss says.

Most of the executives, but not all of them, expect some sort of fourth-quarter rebound in online advertising spending. But that, of course, is a few months away. "Right now, it's tight," says Bellit. "I have yet to see any of my clients increase a budget, in any way, shape or form."