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Online advertising spending will resume double-digit growth in 2010, reaching $61.8 billion worldwide, according to eMarketer. 
Unlike other major media, online advertising spending increased in 2009, growing 2 percent to $55.2 billion, the research firm reported.
By 2014, eMarketer estimates online spending will leap to $96.8 billion worldwide, growing at an 11.9 percent compound annual rate, despite the slow, uneven and fragile global economic recovery.

Meanwhile, the Internet's share of total media ad spending worldwide will jump from just under 12 percent in 2009 to 17.2 percent in 2014.

"In some ways, the recession has propelled online advertising by forcing marketers with limited budgets to make every dollar count," said Jared Jenks, an analyst at eMarketer.
"Marketers now see online as more measurable, more effective and where people are increasingly spending their time."

Nowadays, the importance of digital is a given. Clients and agencies alike are scrambling to build talent and resources to take advantage of this media revolution in our midst. The power of digital to transform brands and drive growth is well proven through myriad case studies, from Subservient Chicken to Fiat's eco:Drive. What's less understood is how digital impacts marketing investments.  The investment model of mass media is so well understood that it has formed the paradigm of thinking about all marketing investments. Yet, this is one of the sources of confusion about digital -- and one that continues to make it difficult for clients to understand what they are buying when they hire a digital agency.

The mass media model is simple: media + agency fee + production = total cost of marketing investment. While there are three components to this equation, the lion's share of the money is spent on paid media -- somewhere in the vicinity of 80 percent in most cases, with the remaining 20 percent split between increasingly commoditized agencies and production companies, with client procurement teams knocking down these costs every day.  The major cost in mass media is, of course, the media itself, and the cost continues to rise as the elusive mass audience affordable to the Super Bowls and World Cups and handful of hit shows like American Idol becomes the only game in town amid a fragmented, digitally enabled world. In fact, the cost of 30 seconds during the Super Bowl rises every year, and the 2011 upfront market seems to indicate single-digit increases for the mass markets generated by television.

So the analog media model boils down to a substantial investment in paid media -- a rather big pie that clients must buy to chase the mass audience. In fact, when digital first appeared on the scene in the 1990s and early 2000s, agencies simply annexed it onto the mass media model -- a new audience channel that required more investments in paid media. Rather than shrinking the pie, it simply added to it. Clients wanting to participate in digital either had to grow the pie to accommodate this new paid media channel or pull money from some other part of it. It wasn't until the Web 2.0 revolution that the real power of digital became apparent: through user participation and social media, we can actually shrink the pie. As a result, digital today represents an investment model that's entirely different from mass media. In fact, the paid media portion of the digital ecosystem is perhaps the least interesting (with the exception of paid search).

As we write this article, Nike's "Write the Future" spot for the FIFA World Cup, produced by Wieden + Kennedy, has been viewed tens of millions of times on YouTube. The post-Web 2.0 digital age has spawned two new concepts that turn the investment model of marketing on its head: owned and earned media. When a brand creates its own media properties that consumers use over and over again, such as a popular video on YouTube or a popular digital platform like Nike+, this is "owned" media. When consumers share these media properties with each other-as when one person passes along a viral link to another, or blogs or tweets about a brand, or "likes" a brand on Facebook-this is "earned" media.
In each of these examples, the idea of purchasing media space and running interruptive display advertising is nonexistent. Instead, brands are tapping the participative power of digital technology to gain audiences without paid media.

Quite likely, the people opting in for participation are exactly the consumers marketers want to reach-the ones most engaged in the brand or the category.  On the other hand, mass media is still tremendously inefficient at targeting an intended audience. The next time you watch a popular television show, count how many of the ads are for products or services that are relevant to you. The rest are a waste of the marketer's money. The investment model for owned and earned media is the inverse of mass media. It requires a more substantial investment in producing innovative content and ideas, and a much smaller (or nonexistent) investment in paid media to create the initial awareness. But the real point is that the entire investment pie is substantially smaller than the mass media paradigm described above.  Digital agencies can build popular platforms or create viral games or videos that reach millions of consumers for a fraction of the cost that it takes to reach a mass audience through television. Sure, clients may pay more for the production of high-value content or software technologies that consumers seek out on their own (or share with each other), but the overall marketing investment is smaller and more targeted the further away a brand gets from mass media. Indeed, there are paid media investments occurring in the digital space, which make sense for all marketers. Any brand that hasn't optimized its search results or purchased relevant key words is missing one of the greatest online opportunities to directly reach hand raisers. And online display advertising is still a great bargain, plus more highly targeted than most print or television.

But the real opportunity of the digital age, for clients and agencies alike, is the shrinking pie of investment afforded in owned and earned media. The only losers in this new investment equation are the mass media companies that controlled access to audiences for decades.

Andy Atherton

Amid the current all-consuming obsession with real-time bidding, hyper-targeting and other buzzwords, it may seem something of an anachronism to pause and reflect on what lessons we in online advertising might learn from TV's upfront marketplace. But there is a reason it works for TV. And those same reasons could help brand dollars flow online.

This type of forward buying of media is so common because it accommodates the way large consumer products companies actually run their businesses, with complex operating structures and supply chains. These same companies spend the majority of total brand advertising dollars -- exactly those elusive brand dollars that have been so relatively slow to come online. So, regardless of our ever-increasing "share of audience time," we in the online ad industry simply won't get that money if we continue our exclusive obsession with capabilities that are exciting, but constantly changing -- and may not actually serve the largest marketers. To get these brand dollars, we must accommodate consumer product companies' need to plan ahead with scalable, predictable forward media-buying capabilities: It's time for an Online Media Futures exchange.

Let me explain.

A streamlined modern supply chain is an amazing thing and, in a "flat" world, a critical thing. Raw material inputs, manufacturing, packaging, distribution, merchandising, replenishment all must work together with clockwork precision. And the financial operation of a well-tuned supply chain is just as well choreographed as the physical operation. Costs, inventory levels, pricing and margins -- all must be carefully planned and managed by finance and procurement teams that are tasked with delivering a predictable stream of earnings from the operating business.

Futures markets have become an essential tool to help procurement and financial management assure the smooth functioning of these complex modern supply chains. For those of you that may be less familiar, futures markets trade standardized contracts for different commodities like financial instruments (indeed some are financial instruments only). Futures contracts exist for a wide variety of different commodities, which are primarily used as raw materials. For example, farmers large and small can sell futures contracts to lock in prices for their crops in advance. The other side of those trades may be a large food company looking to ensure supply and limit price volatility for key ingredients. Similarly, a major airline may buy jet-fuel futures contracts for similar reasons. With these and a variety of other applications, the futures markets have become increasingly important, to the point that futures market activity is often a material factor in quarterly earnings and receives commensurate attention.

One of the key raw materials for most consumer products is media (advertising), which can account for up to 20% of the wholesale price of a product. To use breakfast cereal as an example, that would put media neck and neck with sugar, packaging and vitamins for runner-up to grain on the list of largest ingredients (truly "people eating advertising" as one brand manager put it in an article last summer). So as you might expect then, futures are also very important in the media market. They are just not called "futures."

Futures will gain importance online
The highest profile use of futures in media is in the annual TV upfront, where some $15 billion of media -- more than 10% of annual measured spend across all media -- changes hands between large brand advertisers and TV networks. While these agreements are struck over two weeks, the spending itself occurs over the entire upcoming year -- the essence of a futures transaction. Countless more billions are put to work in forward buys for print and even scatter TV. (The sticklers out there will notice that all of these transactions are more accurately "forwards" and not futures, but this is a technical distinction only and doesn't change the thrust of the argument, i.e. that locking in supply and pricing in advance is as important for media as it is for other key raw materials in the supply chain.)

So, as online media becomes a more material portion of the overall mix (and/or the distinction between online and offline blurs), we should naturally expect to see the futures market become as important online as it is and has been offline. Doubly so as the same procurement teams that rely on futures-based commodity hedging programs get ever more involved in media purchasing.

Why, then, is the infrastructure of the online advertising market today -- including ad exchanges, ad networks and DSPs -- almost exclusively focused on an auction-driven spot market? To be sure, this spot market is vibrant, active and generates tremendous value for many participants, but it does nothing to address the needs of large brand advertisers to plan and manage their supply chains. Brand advertising is (rightly) seen as the next huge growth opportunity for online -- everyone wants the online brand media market to become large and sustainable. But the current online obsession with the spot market is ignoring these advertisers' requirements, and creating runaway complexity as it does so.

Behavioral targeting and other subjective targeting schemes are the currency for this spot-market ecosystem and can be useful tools for some spot-market applications, particularly where online activity can be quickly and precisely tied to online ad exposure. However, they will not support the scale, standardization and delivery predictability a functioning futures market requires.

Fortunately, the objective targeting criteria large brand advertisers have been using for a century offline (e.g., context, demo, geo, quality) are perfectly suited to the task. I say "fortunately" for several reasons. First and foremost, marketing mix models and panel-based studies confirm that effective management of objective targeting criteria and frequency are the fundamental drivers of high ROI sales offline -- where more than 95% of retail commerce still takes place. Objective targeting criteria can also be efficiently and predictably deployed across different media types and providers -- a key enabler in smoothly integrating online media into the broader media mix that is so important in keeping the supply chain humming. Finally, objective targeting criteria also facilitate clearing, which is essential to maintaining the integrity of transactions that are agreed today, but not delivered for months.

Developing an online media futures exchange beside and/or atop the current spot infrastructure is the critical next step for online media. New players have these capabilities and the online media market can no longer afford to ignore the distinction between spot and futures, even as everyone wonders, "Where is all that brand money?"

ABOUT THE AUTHOR

Andy Atherton is cofounder and chief operating officer of Brand.net.

Worldwide online advertising will continue to outpace traditional advertising revenues this year. A new report from IPG's Mediabrands' Magna Global says online advertising will climb 12.4% in 2010 to $61.0 billion. Plus, it will grow 64% from there to over $100 billion in five years. Magna says online advertising will rise by 11.7% in 2011, an average rate of 11.0% through 2015. Overall, worldwide advertising estimates have been pegged at low- to-mid-single-digit gains in 2010. The company estimates that North America will see a 12.3% rise in online advertising to $27.2 billion in 2010, hitting $45.2 billion in 2015. Currently, the report says paid search continues to be one of the strongest components of all online advertising, roughly accounting for half of the $29.8 billion in revenues worldwide. It is pacing tup 16.5% over 2009 results. In North America, Magna estimates paid search to be at $13.1 billion for 2010, a 16.4% gain. All other online advertising -- display, email, video -- will grow more slowly, 8.7% higher, to get to $31.2 billion worldwide. Latin America will continue to be the fastest-growing region, notes Magna -- reaching $3.5 billion of total supplier advertising revenue in 2015, on an average rate of 13.3% growth over the next five years. The biggest specific markets -- China and Russia -- will experience the greatest gains.

Its use is exploding, but ad spending in the sector continues to be a blip on the radar for most brands

Social media use is exploding, but ad spending in the sector continues to be a blip on the radar for most brands.
 
Razorfish, one of the largest digital ad spenders, compiled data on its 2009 digital ad spending. It found that social media display advertising made up just 3 percent of its clients' budgets. Non-display in social media accounted for another 1 percent. The figures pale in comparison to the time spent online. According to comScore, U.S. Internet users spent 11 percent of their time online in 2011 on social media sites.
 
The spending figures reflect that, all the chatter about Facebook, Twitter and iPhone notwithstanding, online media is dominated by traditional vehicles: vertical sites, ad networks, portals and search accounted for 88 percent of buys. Vertical sites got the biggest share of spending, 31 percent. Search was next with a 25 percent share and ad networks received 20 percent. Other emerging media remain blips: mobile accounted for just 2 percent of Razorfish's spending.
 
Like other agencies, Razorfish has found social media is less of an ad medium and more of a platform for building communities. The spending doesn't take the form of ad buys but rather the labor to build a Facebook page and staff it to respond to consumers, said Jeremy Lockhorn, vp of emerging media at Razorfish.
 
"A lot of the display media in social media is very cheap," he said. "More importantly, a lot of the money going into social is people powered, like blogger outreach. You don't see that in the media spend."
 
More money will flow into social in 2010, but Lockhorn believes it will continue to be in the earned media space rather than paid.
 
Overall, Razorfish saw signs of an online ad recovery. After dipping by 13 percent in 2008, ad spending for clients rebounded to increase by 4 percent in 2009. Razorfish expects growth to pick up in 2010. The average CPM paid was between $7 and $8. The median was $5. Razorfish said it expects CPM prices to rise in 2010.
 
Search occupied less of the spending pie at Razorfish. In 2008, the agency spent 37 percent of client budgets there, but in 2009 that dropped to 25 percent. The shop attributed that to normally high-spending clients in financial services and health pulling back budgets. Plus, at one point last year, pharmaceutical firms took down their ads after the FDA sent out warning letters. The losses in those sectors weren't offset by travel and retail, where spending was flat.

Portals fell out of favor, with spending dropping from 16 percent to 12 percent overall. Ad networks continued to hold strong, increasing from 12 percent of spending to 20 percent. Ad exchanges, which only got going late in 2009, accounted for 2 percent of expenditures. Lockhorn predicted more money would flow through them in 2010.
 
Despite excitement over new interactive formats, the overwhelming bulk of Razorfish's spending (77 percent) remained in standard display units. Rich media accounted for another 15 percent, with video at 8 percent.
 
The report, compiled based on spending data and a survey of Razorfish's media department, reveals some interesting impressions of digital media. Google, despite its efforts to be more than "just search," isn't viewed highly in other areas. Razorfish's media planners gave it the highest marks on a four-star system for search, but doled out single stars in other areas, ranging from performance display to video to mobile.
 
Looking ahead, Razorfish's list of publishers to watch includes Facebook, mobile ad network Greystripe, Hulu, Pandora and, perhaps most surprisingly, MySpace. On the latter, Razorfish praised the News Corp. property for mining profile data for ad targeting.