The decline in Internet advertising - though paralleled by a similar trend in print advertising - had more serious and irreversible implications. Most content dot.coms were based on ad-driven revenue models. Online advertising was supposed to amortize start-up and operational costs and lead to profitability even as it subsidized free access to costly content.A similar revenue model has been successfully propping up print periodicals for at least two centuries. But, as opposed to their online counterparts, print products have a few streams of income, not least among them paid subscriptions.
Moreover, print media kept their costs down in good times and bad. Dot.coms devoured their investors' money in a self-destructive and avaricious bacchanalia.
But why did online advertising collapse in
first place? Was it ineffective?
Advertising is a multi-faceted and psychologically complex phenomenon. It imparts information to potential consumers, users, suppliers, investors, community, or other stakeholders in firm. It motivates each of these to do his bit: consumers to consume, investors to invest and so on.
But this is not main function of advertising dollar. Modern economic signal theory has cast advertising in a new and surprising - though by no means counterintuitive - light.
According to this theory, role of advertising is to signal to marketplace advertiser's resilience, longevity, wealth, clout, and dominance. By splurging money of advertising, advertiser actually informs us - "eyeballs" - that it is here to stay, sufficiently affluent to finance its ads, stable, reliable, and dominant.
"If firm X invested a million bucks in advertising - it must be worth more than a million bucks" - goes signal. "If it invested so much money in promoting its products, it is not a fly-by-night". "If it can throw money at an ad campaign, it is stable and resilient".
This signal is missing in online advertising. It drowns in noise. The online noise to signal ratio was unacceptable to advertisers - so they stopped advertising. When noise to signal ratio tops a certain level - ads cease to be effective. The readers or spectators become inured to messages - both explicit and implicit. They tune off.
The noise in online advertising stems from two sources.
A critical element in signal is lost if ad is not paid for. Only paid advertising conveys information about purported health and prospects of advertiser. Yet, Internet is flooded with free advertising: free classifieds, free banner ads, ad exchanges. The paid ads drown in this ocean of free ads. There is often no way of telling a paid ad from a free one - without reading fine print.
Moreover, Internet users are a "captive audience". It is easy to flip ad-besieged channels on TV, or turn ad-laden leaf of a newspaper. It is close to impossible to avoid an ad on Net. Banner ads are an integral part of page. Pop-up ads pop up. Embedded ads are embedded. One needs to install special applications to avoid harassment.
