Evolution of Online Advertising

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Online advertising started in 1994 when HotWired, a web magazine, sold a banner ad to AT&T and displayed it on their web page (Kaye and Medoff, 2001). The ad was sold based on the number of “impressions”— individuals who saw the ad—which was the model followed by most traditional media for this sort of brand advertising. Many web ads were subsequently sold based on “cost per mille,” which is advertising terminology for cost per 1000 viewers of the advertisement and often referred to as CPM. Paying by number of viewers remained the norm until Procter & Gamble negotiated a deal with Yahoo! in 1996 which compensated the web portal for ads based on the “cost-per-click” (commonly known as CPC). Yahoo! was paid only when a user clicked on the ad; this was the web-version of the direct response method commonly used by advertisers for things such as mail and telephone solicitations. However, we will see that most “display ads” on websites—the ads that look like those in newspapers and magazines— were still sold based on thousands of views as of 2008. The exploding supply of web pages led to the birth, in 1994, of several search engines that also sold advertising to make money. At first, they sold banner ads on a cost-per-mille basis—that is, based on how many people saw the ad. However, that approach led to a conflict for the search engine between helping people find things quickly and keeping eyeballs trained on the site to make money. The search engines later moved to the cost-per-click model. GoTo.com—which is now owned by Yahoo!—introduced many of the key technological and business model innovations in the next three years (“GoTo to Overture,” 2005; “History of Pay Per Click, 2007). These included adopting the cost-per-click approach to pricing and the use of auctions to allocate the advertising spots on the page showing results of the search. During
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