Canadian Internet Advertising 2000: A Message for the Medium
March 2000
Presented by: Internet Advertising Bureau of Canada
Executive Summary
1. Introduction
The Internet advertising industry has become a rapidly growing part of the Canadian advertising industry. Even more importantly, it stands to make a significant contribution to the Canadian Internet economy, both in its own right and in its role as a promoter of other Canadian businesses. However, for that potential to be fully realized, the industry must successfully exploit developing opportunities and address a number of significant challenges from external sources. Opportunities arise from the remarkably wired and technologically sophisticated nature of the Canadian market, the increasing acceptance of the Internet as a mass medium, the rapid growth of e-commerce, the broadening range of products and services being offered and purchased online and from the wide array of tools that can be used in Internet Advertising strategies. Challenges the Canadian industry must overcome include the reluctance of Canadian companies to conduct consumer directed business over the Internet, the caution that Canadian consumers have exhibited in transacting online, the loss to American sites of Canadians that do transact online and concerns of businesses about the effectiveness of Internet advertising.
2. The Internet Population
Both globally and domestically, the use of the Internet continues its unparalleled growth. Canada, being one of the most technologically sophisticated countries, has a higher penetration of Internet use on a per capita basis than even the United States. As computer hardware prices continue to drop, the population will continue to expand and to become more diverse.
Presently, males comprise a slim majority of the online population. Online users tend to be more highly educated and more well off than the general population. This population is very attractive to both online vendors and advertisers and will continue to act as a beacon to companies not yet conducting business over the Internet.
Notwithstanding the technological advancements being made, most users continue to access the Internet via low bandwidth connections. Mass penetration will likely not be achieved until about 2002. Consequently, advertisers must recognize that, to the extent that they are swayed by the "bells and whistles" of high bandwidth advertising tactics, they will only effectively be reaching a small percentage of the population.
The prime activities for Internet users continue to be e-mail and searching for information via the Web, in that order. One of the main purposes for online information gathering is now to inform purchasing decisions. As a result, the placement of advertisements, assuming they are well designed, well targeted and properly placed, will be useful tools for consumers as they engage in product research over the Internet.
3. E-Commerce
E-commerce and the Internet are intimately related. The more e-commerce activities that are taking place, the more online advertising will be needed. Conversely, as Internet advertising proves its effectiveness, more cautious potential Internet retailers will be encouraged to enter that market. As more retailing and advertising are done on the Internet, the more consumers will begin transacting online, leading to continued increases in overall e-commerce.
Despite the significant growth in e-commerce internationally and, despite a growth trend in Canada, there is a marked reticence on the part of Canadian companies to engage in business to consumer activities online. Only 14% of Canadian companies are engaged in online selling. Canadian companies have adopted a very cautious "wait and see" approach that is markedly different from the American practice of entering quickly to stake out new territory.
The consequence of this hesitation is already being noticed. The majority of Canadian dollars spent on the Internet are being spent on U.S. sites. This is the case even though most Canadians have stated a preference for shopping on Canadian sites. It appears that there are not the sites to satisfy all the demands of Canadian consumers and, to the extent they do exist, Canadians are not always able to find them.
There also appears to be a similar reluctance on the part of Canadians to transact online. While, on a per capita basis, more Canadians than Americans have access to the Internet, a significantly lower percentage of Canadian Internet users transact online than do American Internet users. In addition, the range of products and services purchased by American online consumers is wider than that purchased by Canadians. Canadians appear to have greater concerns about security, privacy, customer service and reliability than Americans do, possibly reflecting the greater comfort Americans have demonstrated with catalogue shopping. Therefore, it is important that Canadian online retailers effectively communicate not only their existence, but also the overall quality of their sites and associated products and services.
4. Internet Advertising Industry
Internet advertising is a relatively new phenomenon and its tools and strategies are quickly developing. Internet advertising can be used to create brand awareness, to stimulate interest or preferences in the minds of consumers, to provide a means to make a purchase, to provide a means to contact an advertiser or to acquire data about existing or potential customers. The tools that are used to achieve these purposes are varied and evolving.
Currently the most widely used form of online advertising is the banner ad. However, there is a marked movement away from reliance only on banner ads. Tools that are emerging as favourites include sponsorships, interstitials and superstitials and e-mail advertising.
The use of these tools is generating substantial advertising revenues. It is anticipated that U.S. online advertising revenues will exceed US$4 billion for 1999. Canadian revenues have also been increasing, but the absolute figures are relatively low. The expectation for Canadian advertising revenues is CAD$55.5 million. Canadian advertisers apparently share the hesitancy observed in sellers and consumers in Canada.
5. Obstacles to Internet Advertising
Potential Canadian advertisers appear to be taking the same "wait and see" approach as their counterparts that are waiting to begin selling online. Again, this approach allows foreign competitors to stake out an early claim, experimenting with what works and what doesn't. One of the reasons for the hesitation in this area appears to be uncertainty about the effectiveness of
online advertising. This is reflected in concerns expressed about declining click through rates, the perceived high cost of ad placements and about problems with measurement.
Concerns about declining click through rates are largely misplaced. The click through is not a measurement that is tied to a particular objective. Results will vary significantly depending on whether the message within the ad is a meaningful call to action that should reasonably encourage a click through or whether it is a branding image that will have its effect through repeated exposure. Given that banner ads are no longer novel, one ought not to be surprised to see the rates drop, particularly in light of the way the Internet is used. People use the Internet primarily to search for information. They are goal directed and something that will divert them from that goal is a distraction.
Although the posted rates for online advertisements (expressed in cpm's or cost per thousand impressions) appear to have increased, actual rates have declined. 81 percent of online advertising inventory remains unsold. The rate of growth of new inventory is approximately 38 percent. Consequently, the actual rates that can be negotiated are frequently far below posted rates, leaving the concern about the cost of ad placements more imagined than real.
Concerns about measurement on the Internet do have validity. Different publishers use different measurements and even within the same measurement approach, different definitions can be used. Because advertising is priced on impressions, these differences can result in a range of unpredictability in costs. A group created, in part, by the IAB in the United States called FAST (Future Advertisers Stakeholders Taskforce) has proposed a set of standards and guidelines to be considered by the industry. While these are not binding, it is widely acknowledged that the acceptance and implementation of industry-wide standards will help alleviate many of the concerns shared by potential advertisers.
6. Strengths and Challenges for the Industry
The Canadian Internet advertising industry and the entire consumer oriented e-commerce sector are blessed with considerable strengths that position Canada well to take advantage of a number of the opportunities presented by this new medium. However, the challenges that must be overcome to realize these opportunities are daunting. As evidenced by the previous exploration, challenges that threaten to impede the growth of the industry are characterized by "lag" or "lack", such as a lag in Canadian expenditures on online advertising, retailers moving online, and consumers spending online and a lack of standards in Internet advertising measurements and venture capital financing for domestic start-ups.
To successfully address these challenges so that the Industry can fully exploit the opportunities that continue to develop, concerted efforts must be made to provide Canadian advertisers, consumers and businesses assurances that the Internet is a safe, effective and profitable place to conduct business. A number of measures should be considered as the Industry works toward achieving this objective. These include the development of standards for site traffic measurement and auditing procedures associated with serving advertisements; increased research into the effectiveness of online advertising and consumer interaction with the Web; continued education for consumers, businesses, and government institutions on the Internet; and a unified voice for the Internet industry in Canada. An investment in standards, research, and education should help to promote an ongoing dialogue among the Internet's diverse participants, which highlights the value of the Internet for all stakeholders.
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