• by Paul Gough , January 5, 2004

The biggest story in online advertising in 2003 was the fact that it's starting to make waves as a marketing channel again.

After spending much of the '90s enjoying its status as the Next Big Thing, online media was laid low by the bust in 2001. But beyond the many developments that made headlines in 2003, there was a strong undercurrent running through the year: Interactive advertising is back.

The down years seem to be a thing of the past, with a recovery in full swing and the industry's sights set on the record amount spent on online advertising. The high-water mark was $8.1 billion, which New York-based eMarketer said was spent on online advertising in 2000. That number fell to $7.1 billion in 2001 and hit bottom at $6 billion in 2002 before rising to an estimated $6.9 billion in 2003, according to eMarketer. The growth in 2003 - 14.5 percent - was three times greater than the average 4.9 percent rise expected for all media and growing faster than, for instance, consumer magazines, radio and even network TV, which had such a famously great year in 2003. The company predicts the online advertising spend will rise to $7.8 billion this year and surpass 2000's high in 2005.

The signs for renewal of the online advertising sector in 2003 were everywhere. In August, GartnerG2 reported that chief media buyers are using interactive advertising more frequently although many also said they didn't think it was as effective as traditional media. A GartnerG2 analyst said that once spending goes up, experience and comfort would increase too.

"We are seeing significant investments by a number of our clients," Fred Rubin, partner and director of iDeutsch and directDeutsch, told the MediaDailyNews in late August. "We are seeing two to three times what we have seen in prior years." That feeling was echoed by many in 2003. And new research was released showing that the Web played a critical role in consumers' purchasing decisions, particularly affluent Americans. In just one of the many studies released in 2003, a Nielsen//NetRatings and WashingtonPost.com survey found that just about all affluent adults use the Web at least to research their purchases and often to make them. Agencies and research organizations have begun to chip away at the relationship between online and offline purchases in the retail sector. And Forbes.com and GartnerG2 released a study, which found the Internet was crucial to C-level executives, with 48 percent in the survey saying that they click on online advertising.

Growth continued in the online audience, with about 140 million active online users in the United States. It's a little slower growth rate, 4.5 percent in 2003 compared to 8.5 percent in 2002, according to eMarketer. The Internet's household penetration (58 percent) has already passed the newspaper industry's and may soon reach cable TV's rate of 67 percent. Broadband continued to grow in 2003, as well. There were about 17.2 million broadband Internet users in March 2003, according to eMarketer, and will grow at a rate of at least 34 percent in 2003.

There was no shortage of other developments online.

By far the biggest story of the year - for the consumer media at least - were the efforts inside the industry and outside, in government, to stem the flood of spam. The industry itself took steps to self-regulate, adding privacy policies and fine-tuning best practices that were codified by industry groups. Internet service providers like MSN, Yahoo and AOL continued to refine its filtering technologies, which stop millions of pieces of spam every day. But grabbing headlines outside the trade was the movement to stop spam that played out in state legislatures coast-to-coast and, at the end of the year, in Congress. Virginia and California, among other states, passed laws to regulate spam, much to the concern of legitimate marketers who worried that the restrictions on email were too strict. And one of the many bills put forth to fight spam passed both houses of Congress and, at the end of the year, was signed by President Bush. While no one thinks that the spam problem is going to be solved overnight - or by legislation, which can't do much to stop the offshore activity - it set a tone for 2004 and shone spotlights on the legitimate email marketers who now only have to follow one law, not state by state.

There were other non-spam stories that made headlines in 2003. Search-engine marketing caught fire in 2003, with about $2 billion in revenue and growing at an exponential rate. Yahoo! made a big investment in the future of search-engine marketing when in July it paid $1.63 billion for Overture. Google further solidified its position as a leader in pay-for-placement as well. But while search seemed to be all the rage, rich media also grabbed headlines and showed a way to the future of interactive advertising. One of the biggest splashes was made by the Walt Disney Co., which showed that full-motion video could not only work but work every day.

The first initiative, called ESPN Motion, provides video content downloaded to Internet users' desktops, interspersed with advertising. More than 2 million ESPN users have downloaded the application since its official launch in February 2003 and more than 30 of ESPN's biggest advertisers have participated, including Sony and Lexus.

Affiliate marketing also made some strides, not the least of which being the acquisition by ValueClick of Commission Junction for $58 million in cash and stock.

Starcom IP, a unit of Starcom MediaVest Group, found great success in its broadband upfront in 2003, when it decided to buy interactive advertising like a big media agency would buy television. By early October, SMG placed $5 million with leading online players like Yahoo!, MSN and Feedroom.

"The whole idea began with the idea that we have this engaging video advertising and what other ways we could use it over time," said Rishad Tobaccowala, president of Starcom IP. "There is all this money going into television. Could we use some of it and go to market and tell the broadband people we're serious, with real money and real clients."

AOL, which has been under investigation by the Securities and Exchange Commission due to some of its past practices in booking online advertising, suffered through another year of losing dialup customers to broadband providers. It also lost its place in the corporate name of its parent company, when the AOL name was dropped from AOL Time Warner. The company began trading as Time Warner (TWX) before the end of the year.

Other name changes were in the offing too, although not for the reasons that AOL was dropped by Time Warner. The parent company of Avenue A and Atlas DMT changed its name to aQuantive earlier in the year. Gator, which has its share of detractors in online marketing, changed its name to Claria Corp.

And spam wasn't the only legal story to hit online advertising. Both Claria and WhenU prevailed in court cases, with WhenU in November receiving a favorable decision in its efforts to keep distributing ad-serving desktop software that some Web sites had sought to keep out. Claria had earlier received favorable legal news as well.

Not so fortunate was D Squared Solutions LLC, which has been sued by the Federal Trade Commission for allegedly hijacking a Microsoft Windows feature that sends pop-up ads to unwitting customers, even when they're not using the Web.