Internet Direct Marketing & Advertising Services

Page 1
MORGAN STANLEY DEAN WITTER
Comment
Equity Research
North America
Industry
Internet Direct Marketing &
Advertising Services
Michael J. Russell
Industry Overview
February 22, 2001
+1 (1)212 761 6352
Michael.Russell@msdw.com
Robert J. Keith
Correction: Does Internet
Rod Feuer
Mary Meeker
Mark Mahaney
Advertising Work? Yes, But...
COMPANIES FEATURED
• Banner ads look like a surprisingly cost-effective branding tool
ADVO (ADVO $44)
Neutral
At today's prices, we believe banners are cost-effective in generating
Harte-Hanks (HHS $23)
Neutral
Catalina (POS $34)
Neutral
brand recall and brand interest, though not as good at creating
Valassis (VCI $33)
Neutral
awareness.
• We think direct mail, e-mail & coupons are better direct marketing tools
BEST IDEAS
Most solo direct mail, shared direct mail and coupons appear to
TMP Worldwide (TMPW)
Strong Buy
perform better than banners; however, e-mail ranks near the top of
Avenue A (AVEA)
Outperform
cost-effective direct marketing.
DoubleClick (DCLK)
Outperform
• Traditional advertisers spend little of their budgets on the Web
The top six US advertisers spend less than 1% of their budget on the
Web. Additionally, based on our research 55-70% of Web ad
spending is from dot-coms.
• If Internet advertising works for branding, why aren't advertisers using it?
Agencies gain more creative fees from TV spots than banners.
Advertisers don't yet trust the Internet's efficacy and continue to be
wary of the new, new thing, a problem common to any new media.
Please refer to important disclosures at the end of this report.

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MORGAN STANLEY DEAN WITTER
Correction: Does Internet Advertising Work? Yes, But...
Summary and Investment Conclusion
would further increase the affordability of Internet
Does today’s Internet advertising work? We get asked
advertising.
this question every day. Interestingly, no one asks us “Does
television advertising work?” or “Do coupons work?” But,
Even if banner pricing rose by 20%, we
to answer questions about Internet advertising requires a
comparison to a wide range of alternatives. That is the
believe it would still be the most cost-
purpose of this report.
effective branding tool.
Our answer is a qualified “Yes, Internet advertising
We believe that banners are a good — but not superb —
works, but...” We have conducted an in-depth analysis of
direct marketing tool. Too much confusion emanates from
data gathered from many studies by AdRelevance, Avenue
cost-per-click or click-through rate calculations, which are
A, The Cable Advertising Bureau, C.E. Hooper, Inc., The
simply requests for information rates. We focus instead on
Direct Marketing Association, Dynamic Logic, Media
cost-per-order, which is the cost of generating a sale.
Dynamics, NCH, The Magazine Advertising Bureau, and
Nielsen Media Research to form our conclusions. Our
• We estimate that shared direct mail, direct e-mail,
primary conclusion is that Internet advertising banners are a
and coupons are two to four times more cost-
cost-effective branding tool, but they are only a moderately
effective in generating orders than Internet banners.
effective direct marketing tool.
• The Internet may be the ultimate direct marketing
We believe banners represent a cost-effective means of
tool, but through e-mail, not static banners.
branding:
•
•

Direct e-mail may get a performance boost from

Banners exceed or are as good as magazines,
being used as a retention tool more than an
newspapers and television in generating brand
acquisition tool. Retention tools tend to have higher
recall and brand interest, in our view. However, to
response rates.
date we believe the Internet is only about half as good
as TV and magazines at generating brand awareness.
• Currently, digital direct marketing (including
•
banners and e-mail) does not beat all paper-based

When branding is considered in terms of cost
direct marketing in cost-effectiveness — shared
effectiveness, banners look even better, based on our
direct mail and coupons do better. Solo direct mail,
research. We estimate that banners are 40–80% better
whether first class or third class, targeted or not,
than TV, magazines, and newspapers in brand recall
appears to be a more expensive means of reaching
and generating interest in a brand. As for generating
consumers than digital direct marketing.
brand awareness, we believe banners are about 40%
better than TV, but remain about 20% worse than
Longer term, as consumers become more comfortable with
magazines.
security and privacy issues, Internet advertising may lead to
•
more sales and therefore be viewed as a better direct

At the average effective cost per thousand (CPM)
marketing tool. However, we believe it is important to
price of $3.50, banners are 80% cheaper than TV
remain open to the concept that today’s Internet shopper is
and newspapers, making them very cost-effective, in
browsing and researching more and closing the deal less,
our view. Even if banner pricing rose by 20%, we
and marketers will use this background for evaluating
believe it would still be the most cost-effective
effectiveness.
branding tool. However, undisciplined ad pricing
stemming from supply and demand imbalances and a
Theoretically, direct marketers could push for further
set of struggling companies have all lead the Internet’s
price declines in banner CPMs. Based on Internet CPM
CPM to continue to fall. We feel that more price
data in 2H00 and so far in 2001, double-digit pricing
declines are likely in the near term, which we believe
declines seem to be the order of the day. Despite the falling
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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MORGAN STANLEY DEAN WITTER
CPM, Internet advertising revenues have grown faster than
scales in favor of companies with a core-competency in
any other media in history as the supply of inventory has
Internet advertising, rather than TV advertising.
more than offset the declining price per unit.
• The eyeball is attracted to motion, while the ear is
However, not every marketer can utilize all of these
attracted to sound. Rich media has been shown to be
marketing services. Coupons tend to be used by
five times more effective at generating brand recall than
consumer-packaged goods and health and beauty
traditional banner ads. As more users hook up to the
companies. Furthermore, getting a mailing address may be
Internet via broadband connections, more rich media
easier than getting permission to use an e-mail address for
ads will develop and will likely garner greater response
commercial solicitations.
rates.
• Rich media ads cost more to create, which means
Currently, all digital direct marketing
advertising agencies should profit more from creating
does not beat all paper-based direct
them than static banners. This could lead the agencies
marketing in cost-effectiveness
to support Internet advertising more in the future (they
currently generate small fees from creating banner
campaigns). For now, the average banner costs less
Will Internet advertising perform better in the future?
than $10,000, while the average TV spot costs more
Our answer is an unqualified “Yes.” Below we describe
than $340,000. TV creative services leave more room
why.
for agency profits.
• The Internet is still a small medium. As the users and
What Do Clients Think About Internet Advertising?
the time per user metrics increase (and other media
Traditional US advertisers are not spending a significant
decrease), advertisers will eventually follow the lead of
portion of their marketing budgets online. General
consumers. Advertising budgets follow consumer’s
Motors, the top US advertiser in 2000 (as extrapolated from
“time share’s.”
data through August), has spent less than 1% of its
•
advertising dollars on the Internet, by our calculations. The

Today’s banner ads are too small, too static, always in
story is the same at Philip Morris, DaimlerChrysler, Procter
the same location, and too easily missed. This will
& Gamble, and Ford, the second-, third-, fourth- and fifth-
likely change.
largest US advertisers through August. While this alerts us
•
to just how little the large traditional advertisers are
CNET (CNET, $14, rated Outperform by Mary
spending on the Internet, it also heightens the opportunity
Meeker) appears to be the most creative Internet
for e-marketing, as there is a greater share of traditional
advertising supplier, offering a wider range of banner
advertisers’ budgets to grab.
sizes and formats. Others could soon follow suit,
which would spur innovation and creativity.
Disney and Microsoft are the most notable exceptions.
•
Disney is the only advertiser in the top 20 (ranked number
We believe that fuller screen, interruption-based
seven) to devote more than 1% of its budget to the Internet
Internet ads, like those presented by AOL (AOL, $45,
(it spent nearly 2% of its marketing budget on the Internet
rated Strong Buy by Mary Meeker, Richard Bilotti, and
through August). Microsoft, the 30th-ranked total
Mark Mahaney) or Unicast, are likely to become more
advertiser, is the largest online advertiser and has spent the
prevalent — and irritate users. (But hey, users want
something for free and investors want profitable
largest portion of its total budget on the Internet — 19%.
business models, so more ad interruptions are likely in
Disney’s perspective is very important, complex and
the future).
discouraging. Disney (DIS, $32, rated Outperform by
•
Richard Bilotti) was caught up in the Internet advertising
While full-screen ads increasingly appear, Personal
storm, and recently announced plans to shut down its
Video Recording technology, like TiVo, will likely
Go.com portal. Disney is a traditional brand, a traditional
push TV advertising toward product placement
promotions and streaming banners. This may tip the
media company, and a new media company. In announcing
the closure of Go.com on January 29, Disney CEO Michael
Eisner was quoted in the Financial Times as saying, “The
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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MORGAN STANLEY DEAN WITTER
advertising community has abandoned the Internet.” This is
not good from the standpoint of a seller of Internet
Based on This Analysis, What Stocks Should One Own?
advertising space, but it is also worrisome from the
Following on the thesis of this report, we are more positive
standpoint of an industry buyer. Disney is the only top 20
on the outlook for three companies we currently rate
advertiser to devote more than 1% of its budget to the
Neutral: Catalina, ADVO, and Valassis. While it may seem
Internet (it spent nearly 2% of its marketing budget on the
strange in a report on Internet advertising effectiveness to
Internet through August 2000). If a lot of this spending was
point to the efficacy of traditional media, however we find
to support Go.com, then Disney may fall back into the pack
we appreciate the value of marketing tools like coupons
on Internet advertising commitments.
(especially targeted) and shared direct mail.
Internet advertising spending may be even more
Among the e-advertising companies we cover, we
dependent on dot-coms than we thought. By categorizing
recommend DoubleClick and Avenue A (both rated
the top 50 and top 100 Web advertisers, we calculate that
Outperform), for their long-term benefits. While we
55-70% of Internet advertising spending is from dot-coms.
think that the market’s expectation of a turnaround in these
However, AOL and Yahoo! (YHOO, $27, Outperform,
businesses may occur more in the second half than the
covered by Mary Meeker and Mark Mahaney) are about
second quarter, we look for three strategies to come more
25% and 34% exposed to dot-com advertising, respectively,
into focus before we would recommend these stocks more
by our estimates. Assuming this is correct, the implication
aggressively:
would be that the rest of the Internet’s advertising is from
•
dot-com advertisers. We find that the middle ground is

More attention on branding benefits to attract
most appropriate, and calculate the dot-com advertising
traditional advertisers. This should shore up the
presence on the Internet in total to be in the 55-70% range.
perceived value of Internet advertising and pricing.
•
This is higher than most other analyses, and may differ from

A continued desire to move beyond the banner. A
other research in that we are counting dollars of advertising,
push for bigger and more variable ad formats should
as opposed to advertising impressions or numbers of
help, as waiting for the rollout of broadband and the
companies. We are also separating the various divisions
ensuing rich media may take a while.
within companies (for instance, we count MSN as dot-com,
•
but Microsoft as traditional and barnesandnoble.com as dot-

A focus on e-mail to attract direct marketers. To
com, but Barnes and Noble as traditional). Interestingly, of
date, e-mail offerings at DoubleClick and Avenue A
the top 100 Internet advertisers, about 45 are traditional
have been nascent, proving that it may be harder to get
companies. It is just that in terms of spending, it looks more
this “right” than many previously thought. In our
skewed.
opinion, since the direct marketing sales pitch fits so
well with direct e-mail, getting this right should
At this point, dot-coms are more focused on direct
resonate with their current set of traditional and dot-
marketing effectiveness, which should favor direct e-
com customers.
mail over banner ads. If the dot-coms become interested
in branding again, the banner ads are likely to be a better
Outside of our coverage universe, we are impressed with
place for them than Super Bowl ads. However, in this
the unique position of AOL Time Warner and the
survival mode, they are more likely to favor cost-
willingness to tinker with the online ad space by CNET.
effectiveness in generating orders, which favors shared
AOL Time Warner’s AOL appears to be moving beyond the
direct mail, direct e-mail, and coupons before banner ads.
banner with full-screen pop-up ads that are more broadcast
style in their appearance and are therefore more advertiser-
friendly. CNET appears willing to tinker with size,
We calculate that 55-70% of Internet
location, and depth of its ad space to triple some response
advertising spending comes from dot-
rates in an effort to move beyond the banner and impress
com advertisers.
advertisers.
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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Page 5
MORGAN STANLEY DEAN WITTER
Exhibit 1
Comparing Media Effectiveness in Branding and Direct Marketing
Media Advertising
Internet
Marketing Services
Solo Direct
Solo Direct
Solo Direct
POS Targeted
Shared Direct
Mail: 1st Class Mail: 1st Class Mail: 3rd Class
TV
Magazines
Newspapers
Banners
eMail
FSI Coupons
Coupons
Mail
targeted
untargeted
untargeted
Leading companies
VIA
GCI
DCLK
VCI
POS
AD
Branding
CPM - cost per 1000 impressions
$16.00
$6.00
$19.00
$3.50
$20.00
$7.00
$76.70
$40.00
$965.58
$701.75
$518.24
Indexed to Internet
457%
171%
543%
100%
571%
200%
2191%
1143%
27588%
20050%
14807%
Generating Brand Awareness:
36%
29%
NA
14%
NA
NA
NA
NA
NA
NA
NA
Indexed to Internet
257%
207%
NA
100%
NA
NA
NA
NA
NA
NA
NA
Cost Effectiveness
56%
121%
NA
100%
NA
NA
NA
NA
NA
NA
NA
Brand Recall Ability:
17%
26%
23%
27%
NA
NA
NA
NA
NA
NA
NA
Indexed to Internet
63%
96%
85%
100%
NA
NA
NA
NA
NA
NA
NA
Cost Effectiveness
14%
56%
16%
100%
NA
NA
NA
NA
NA
NA
NA
Generating Brand/Product Interest:
46%
44%
NA
44%
NA
NA
NA
NA
NA
NA
NA
Indexed to Internet
105%
100%
NA
100%
NA
NA
NA
NA
NA
NA
NA
Cost Effectiveness
23%
58%
NA
100%
NA
NA
NA
NA
NA
NA
NA
Direct Marketing
Response rate (request for info per impression)
NA
NA
NA
0.3%
3.0%
NA
NA
NA
NA
16.6%
13.5%
Cost Per Reponse / Cost per Click
NA
NA
NA
$1.17
$0.67
NA
NA
NA
NA
$4.23
$3.84
Sales rate
NA
NA
NA
0.1%
1.5%
1.5%
8.5%
4.8%
2.0%
0.5%
0.4%
Additional cost of sale
NA
NA
NA
$0.00
$0.00
$0.80
$0.80
$0.00
$0.00
$0.00
$0.00
CPO - cost per order
NA
NA
NA
$3.50
$1.33
$1.27
$1.70
$0.83
$48.28
$131.98
$119.85
Cost Effectiveness Relative to Internet Banners


Average Branding
31%
78%
16%
100%
NA
NA
NA
NA
NA
NA
NA





Ranking
3
2
4
1
NA
NA
NA
NA
NA
NA
NA
Generating Responses
NA
NA
NA
100%
175%
NA
NA
NA
NA
28%
30%





Ranking
NA
NA
NA
2
1
NA
NA
NA
NA
4
3
Generating Orders
NA
NA
NA
100%
263%
276%
206%
420%
7%
3%
3%





Ranking
NA
NA
NA
5
3
2
4
1
6
7
7
Note 1: When comparing direct marketing effectiveness, there should be at least qualitative distinction between targeting and mass effectiveness. Mass media, like Free
Standing Insert (FSI) coupons, offer coupons to everyone, which means some would buy your product without these savings but you cannot keep them from clipping the
coupon. This is not as good as coupons that are targeted to those you wish to influence (and away from those who you wish to leave alone in their behavior). We believe
this is why Catalina’s Point-of-Sale coupon effectiveness is higher than Valassis’ FSI effectiveness.
Note 2: When comparing direct marketing tools, it is also helpful to know which are used more in higher response rate retention programs and which are used in lower
response rate customer acquisition programs. Direct e-mail tends to be retention-based, while banners tend to be acquisition-oriented. We think this tilts the cross-
media comparison in favor of direct e-mail.
Sources: Morgan Stanley Dean Witter, 24/7 Media, AdRelevance, ADVO, Cable Advertising Bureau, C.E. Hooper, Inc., Direct Marketing Association, Dynamic Logic,
Media Dynamics, NCH, Magazine Advertising Bureau, Nielsen Media Research.
Observations on Media Effectiveness
shown to be five times more effective at generating brand
The Internet performs well across branding measures,
recall than traditional banner ads, further lifting the
but we believe it is better for those who already have a
Internet’s brand recall lead.
brand than those who are trying to develop one. For
many sites, the Internet is outclassed by television and print
Exhibit 2
in generating awareness of a brand, but leads print media in
Advertising Effectiveness Rankings
brand recall and is about even in generating interest in a
Branding Metric
Ranking
brand. (Note: The studies conducted did not analyze rich
Generating Brand Awareness
media on the Internet, rather they focused only on static
Television
Magazines
banner ads. Thus, future Internet advertising incorporating
Banners
rich media and better targeting will likely elevate the
Internet’s ranking. Of course, interactive television will
Generating Brand Recall
likely alter the landscape as well.)
Banners
Magazines
Newspapers
In the area of brand recall, the Internet appears to lead
Television
magazines, newspapers, and television, in that order.
Consumers studied showed a 27% greater ability to recall a
Generating Product Interest
Television
brand after seeing an Internet ad than before. Magazines
Banners, Magazines
increased consumer brand recall by 26%, newspapers by
23%, and television by 17%. Streaming media has been
Sources: Morgan Stanley Dean Witter, 24/7 Media, AdRelevance, ADVO, Cable
Advertising Bureau, C.E. Hooper, Inc., Direct Marketing Association, Dynamic
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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MORGAN STANLEY DEAN WITTER
Logic, Media Dynamics, NCH, Magazine Advertising Bureau, Nielsen Media
effective CPM ranks it as the most cost-effective media —
Research.
above television, magazines, and newspaper.
In generating interest in a product or brand, the
Exhibit 3
Internet appears to rank in the middle of the pack. After
Cost-Effectiveness Rankings
seeing a banner ad, consumers were 44% more interested in
Branding Metric
Cost-Effectiveness Rankings
learning more about a product than they were before seeing
Generating Brand Awareness
the ad. The comparable figure for television was 46% and
Magazines
for magazines was 44%.
Banners (Effective CPM)
Television
In generating awareness for a particular brand, the
Generating Brand Recall
Internet lags both television and magazines. That having
Banners (Effective CPM)
been said, the Internet has been shown to raise awareness of
Magazines
a particular brand by an average of about 14% (television
Newspapers
Television
came in at 36% and magazines at 29%). It has also been
demonstrated that more exposure to banner ads builds more
Generating Product Interest
brand awareness.
Banners (Effective CPM)
Magazines
The Internet is relatively inexpensive, which leads to
Television
branding cost-effectiveness. Banner advertising based on
Sources: Morgan Stanley Dean Witter, 24/7 Media, AdRelevance, ADVO, Cable
the list price is less cost effective in generating brand
Advertising Bureau, C.E. Hooper, Inc., Direct Marketing Association, Dynamic
Logic, Media Dynamics, NCH, Magazine Advertising Bureau, Nielsen Media
awareness, brand recall, and product interest than television,
Research.
magazines, and newspapers. (Although the list price varies
by site, AdKnowledge reports an average Internet
Banners are a good — but not a superb — direct
advertising list price of about $34 for banners.) However,
marketing tool. Internet advertising appears to be a
we do not believe this is the right way to calculate
moderately cost-effective means of generating sales via
effectiveness.
direct marketing. Internet advertising is not the shining star
of direct marketing; we believe shared direct mail, direct e-
We calculate an effective CPM of about
mail, and coupons are. The value of direct marketing is
largely based on the relevance of the message. Thus,
$3.50 for 2000, which coincidentally
targeting the appropriate message to the appropriate
approximates the media CPM for
consumer is the key in the online world, just as it is in the
DoubleClick and looks like it is on pace
offline world. As targeting on the Internet and via e-mail
to decline more than 10% in 2001.
improves over time, we expect these forms of direct
marketing to move up in the rankings.
The effective CPM tells a different story. (The effective
While the current click-through rate (response rate) on
CPM is the price that is actually paid by the advertiser after
banner advertising is about 0.3%, most of these are
all bargaining and bartering is complete, whereas the list
simply requests for more information. The sales rate is
price CPM is simply a number on a rate card from which
about 0.1% of the banners viewed, which implies a 33%
the bargaining begins.) We calculate an effective CPM of
conversion rate. This pales in comparison to e-mail’s
about $3.50 for 2000, which coincidentally approximates
3.0%-plus response rate (sales and requests for more
the media CPM for DoubleClick and looks like it is on pace
information) and 1.5% sales rate. Most interesting of all,
to decline more than 10% for 2001.
click-through rates have been shown by AdKnowledge,
Avenue A, and others not to be correlated with sales.
Based on an effective CPM of about $3.50, banner
Another interesting fact unearthed by Avenue A is that
advertising is less cost-effective at generating brand
approximately 13% of the banners that are clicked on, are
awareness than magazines, but more than television. In
clicked on by current customers. Thus, we conclude
generating brand recall, the Internet’s effective CPM is
banners are a good customer retention tool, as well as a
more cost-effective than television, magazines, and
prospecting tool.
newspapers. In generating product interest, the Internet’s
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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MORGAN STANLEY DEAN WITTER
In generating cost-effective orders via direct marketing,
complete. Of course, many sites demand much higher fees
the Internet falls in the middle of the road, while e-mail
and many go for considerably less.
ranks near the top. Shared direct mail is the most cost-
effective means of direct marketing, followed by free
Exhibit 5
standing insert coupons, e-mail, point-of-sale targeted
Average Rate Card CPM by Site Category
coupons, banner advertising, and direct mail.
Category
CPM
Health & Fitness
$43
When comparing direct marketing effectiveness, there
Home & Garden
$43
Business & Finance
$38
should be at least a qualitative distinction between
General News
$38
targeting and mass effectiveness. Mass media, like Free
Movies & TV
$34
Standing Insert (FSI) coupons (mass-market coupons
Automotive
$32
offered to all consumers whether they had previously
Society, Politics & Science
$30
Travel & Maps
$29
planned to purchase the product or not), result in extra costs
Sports & Recreation
$28
as many consumers would have purchased the product
Portal
$27
without the coupon incentive. This is in contrast to coupons
Kids & Family
$26
that are targeted to individuals that advertisers wish to
Search Engine
$25
Music & Streaming Media
$25
influence. This is why, in our view, Catalina’s Point-of-
Personal Expression
$25
Sale coupon effectiveness is higher than Valassis’ FSI
Yellow & White Pages
$24
effectiveness.
Games
$24
Comics & Humor
$24
Community
$20
When comparing direct marketing tools, it is also
helpful to know which are used in (higher response rate)
Source: AdRelevance
retention programs and which are used in (lower
response rate) customer acquisition programs. Direct e-
While the Internet’s rate card CPM looks extremely
mail tends to be retention-based, while banners tend to be
high compared with other media, its effective CPM of
acquisition-oriented. This tilts the cross-media comparison
$3.50 appears quite reasonable. Daily newspapers
in favor of direct e-mail.
generate the highest CPMs (about $19) due to their
targeting ability. Prime-time broadcast television
Exhibit 4
commands the second-highest CPM (about $16) due to its
Cost-per-Sale via Direct Marketing Rankings
broad reach. Eventually, we believe the Internet will likely
Direct Marketing Metric
Ranking
be able to combine very good targeting and very broad
Cost-per-Sale
reach and thus generate a CPM above its current level.
Shared Direct Mail
Free Standing Insert Coupon
Exhibit 6
eMail
CPMs by Media
Point of Sale Targeted Coupons
Media
Average CPM
Banners
Direct Mail
Daily Newspapers
$19
Prime-Time Broadcast TV
$16
Sources: Morgan Stanley Dean Witter, 24/7 Media, AdRelevance, ADVO, Cable
Radio
$6
Advertising Bureau, C.E. Hooper, Inc., Direct Marketing Association, Dynamic
Magazines
$6
Logic, Media Dynamics, NCH, Magazine Advertising Bureau, Nielsen Media
Day-Time Broadcast TV
$5
Research.
Internet Effective CPM
$4
The Cost of Internet Advertising
Source: Morgan Stanley Dean Witter
Internet analysts and investors continuously attempt to
The many sizes and shapes of advertising on the Internet
gauge the cost of advertising on the Internet, or the CPM.
each demand a different price. The most expensive is the
The Internet’s virtually limitless supply of advertising
vertical banner, which goes for a rate card price of $43,
inventory makes this a very tough job. Most sites start with
according to AdRelevance. This is largely due to its greater
a rate card CPM and then bargain with advertisers to reach a
branding and response generation ability. The half banner
more suitable price. It is our belief that an average effective
comes in second with a rate card price of $33. The micro
CPM of about $3.50 exists once all of this bargaining is
button is the least expensive, commanding an average rate
card CPM of $6.
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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Page 8
MORGAN STANLEY DEAN WITTER
Types of Internet Advertising
Exhibit 9
The banner ad was the original Internet advertising format.
Percentage of Internet Advertising Impressions
Since 1995, the sizes and shapes of Internet ads have
changed to promote greater branding and click-throughs.
Micro Button
The banner is still the most popular type of advertising on
18%
the Internet. Below is a list of the most popular types of
Full Banner
Internet banner advertising.
37%
Exhibit 7
Average Rate Card CPM of Various Advertising Sizes
Short Button
19%
Micro Button
$6
Short Banner
Short Button
$18
Medium Button
1%
Medium Button
$20
4%
Half Banner
Tall Button
$21
Tall Button
Vertical Banner
16%
4%
Vertical Banner
$43
1%
Half Banner
$33
Source: AdRelevance
Short Banner
$32
Full Banner
$30
Exhibit 10
$0
$10
$20
$30
$40
$50
Top Overall U.S. Advertisers Through August, 2000
Company
% of Budget Online
Online Advertiser Rank
Source: AdRelevance
1. General Motors
<1%
543
2. Philip Morris
<1%
623
Exhibit 8
3. Daimlerchrysler
<1%
852
Percentage of Sites Using Type of Advertising
4. Procter & Gamble
<1%
2,079
Type of Advertising
% of Sites Accepting
5. Ford Motor
<1%
218
6. Time Warner
<1%
118
Full Banner
97%
7. Walt Disney
2%
15
Micro Button
76%
8. Johnson & Johnson
<1%
1,720
Short Button
68%
9. Pfizer
<1%
1,269
Medium Button
52%
10. Unilever
<1%
4,213
Half Banner
42%
11. Toyota
<1%
245
Tall Button
36%
12. AT&T
1%
49
Short Banner
29%
13. McDonalds
<1%
747
Vertical Banner
16%
14. National Amusements
<1%
2,897
Other
8%
15. News Corp
<1%
182
Source: AdRelevance
16. Honda Motor Co
<1%
189
17. Verizon
<1%
125
18. Nissan Motor Co
<1%
1,153
Other types of advertising are catching up to the banner ad
19. Ford Motor Dealer Association
<1%
NA
in terms of impressions garnered. According to
20. Sony
<1%
152
AdRelevance, the full banner accounts for 37% of Internet
21. Federated
<1%
549
advertising impressions. The various sizes and shapes of
22. US Government
NM
NM
23. Tricon Global Restaurants
<1%
965
buttons ad up to 35% of all Internet advertising, a close
24. Diageo Plc
<1%
920
second to banners.
25. Sears
1%
55
26. MCI Worldcom
1%
95
27. Pepsico
<1%
271
28. General Motors Local Dealers
NM
NA
29. Loreal
<1%
942
30. Microsoft
19%
1
Sources: Morgan Stanley Dean Witter, AdRelevance, Competitive Media
Reporting
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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Page 9
MORGAN STANLEY DEAN WITTER
Traditional Advertisers Coming Online… Very Slowly
Exhibit 12
The top traditional advertisers are starting to advertise
Top 50 Internet Advertisers (January-August 2000)
online, but at a very slow pace. Furthermore, once they
& Whether We Rank Them as Dot-Coms
have a presence on the Internet, the top advertisers are
Rank
Brand
Dot-Com
devoting only a very small portion of their budget to
1
MSN
Yes
Internet advertising. Our industry forecast projects that
2
Yahoo!
Yes
3
Capital One
No
Internet advertising accounted for 4% ($7.6 billion) of total
4
Microsoft
No
US advertising in 2000. When we look at Internet
5
AmeriDebt
No
advertising as a share of total US marketing (including
6
Netscape
Yes
marketing services, public relations, promotions, direct
7
Snowball.com
Yes
8
Amazon.com
Yes
marketing, and others) in 2000, we estimated that it
9
LifeMinders.com
Yes
represented only about 1.5% of the total marketing budget.
10
One & Only
Yes
11
Network Solutions
Yes
Our analysis shows that the top US advertisers are not
12
Corbis
No
spending anywhere near this amount of their marketing
13
Fidelity Investments
No
14
Ebay
Yes
budget online. Although the top marketers are generally
15
Go
Yes
automotive and consumer product goods manufacturers
16
Lowestfare.com
Yes
(goods that are not easily purchased on the Internet), we are
17
AOL
Yes
still surprised by the meager portions of their budgets that
18
ZDNet
Yes
19
Net2Phone
Yes
the top advertisers are spending on line.
20
WingspanBank.com
Yes
21
Ubid
Yes
Exhibit 11
22
WebMD
Yes
Allocation of Ad Budgets Among Traditional and
23
NextCard
No
Internet Media by the Top Advertisers on the Internet
24
E*TRADE
Yes
25
Excite
Yes
Through August 2000
26
ClassMates.com
Yes
Company
% Traditional
% Internet
27
About.com
Yes
1. MSN*
81%
19%
28
NeoPlanet
Yes
2. Yahoo!
26%
74%
29
Bonzi Software
No
30
Cassava Enterprises
No
3. Capital One
46%
54%
4. Microsoft
81%
19%
31
GetSmart.com
Yes
5. AmeriDebt
25%
75%
32
Ameritrade
Yes
33
ESPN
No
6. Netscape
21%
79%
7. Snowball.com
27%
73%
34
Citicorp
No
8. Amazon.com
53%
47%
35
AltaVista
Yes
36
RadioShack
No
9. LifeMinders.com
25%
75%
10. One & Only
0%
100%
37
ServiceMagic
No
38
Healthquick.com
Yes
Sources: Morgan Stanley Dean Witter, AdRelevance, Competitive Media
39
Qwest
No
Reporting
40
First USA
No
* MSN is shown as a share of Microsoft’s total budget.
41
K-Mart
No
42
HealthAxis.com
Yes
43
1-800-FLOWERS.COM
Yes
Of course, any new medium requires time to gain
44
MP3.com
Yes
acceptance. According to Yahoo!’s CEO Jerry Yang,
45
MBNA America Bank
No
Procter & Gamble applied only 5% of its marketing budget
46
X10
Yes
to the relatively new medium of television in 1950. Five
47
Sun Microsystems
No
48
AskMe.com
Yes
years later, the company lifted TV’s share of its marketing
49
AT&T
No
budget to 80%. By that time, TV advertising had increased
50
enews.com
Yes
six times from $171 million to $1,035 million. This is a
Source: Morgan Stanley Dean Witter Research & AdRelevance
relevant example, in our view, of how quickly advertisers
will move their marketing budgets once they trust a
General Motors, the top US advertiser for 2000, spent
medium. Although we do not expect advertisers to
less than 1% of its advertising dollars on the Internet, by
immediately spend 85% of their budget on line, we are in a
our calculations. The story is the same at Philip Morris,
period of building trust with a new media and would expect
DaimlerChrysler, Procter & Gamble, and Ford, the second-,
significant gains in advertising share for the Internet.
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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Page 10
MORGAN STANLEY DEAN WITTER
third-, fourth-, and fifth largest U.S. advertisers this year
Internet brand, due to its Internet-only business. If one were
(extrapolated from data through August). In fact, Disney is
to consider MSN, the largest Internet advertiser, as a
the only advertiser in the top 20 (ranked number seven) to
traditional, the ratio would shift to 57% dot-com and 43%
devote over 1% of its budget to the Internet (Disney has
traditional. Additionally, it should be noted that
spent nearly 2% of its marketing budget on the Internet).
AdRelevance does not capture sponsorships or rich media
Microsoft, the 30th ranked total advertiser in 2000, is the
advertisements, which are more expensive and more likely
largest online advertiser and has spent the largest portion of
to be used by traditional companies.
its total budget on the Internet — 19%.
We have included a ranking of the top 50 advertisers on the
There is very little overlap between the top advertisers on
Internet so that one can judge for him/herself whether our
the Internet and the top advertisers inclusive of all media.
break-out between dot-coms and traditionals is appropriate,
Only three companies — Disney, AT&T and Microsoft —
and, if not, conduct an individual analysis.
are among the top 50 advertisers on the Internet and in all
media. The top Internet advertisers are dominated by
While inter-media comparisons of branding and sales
technology-oriented companies, particularly those with
generation are difficult, we worked with what we believe is
Internet operations. These companies typically spend the
the best data available to generate a comprehensive picture
majority of their advertising budgets on the Internet.
that compares all major media. In the traditional space, we
relied on data from Morgan Stanley Dean Witter, ADVO,
Dot-Coms Represent 55-70% of Internet Advertising
Avenue A, The Cable Advertising Bureau, C.E. Hooper,
Although most research companies put the dot-com/
Inc., The Direct Marketing Association, Media Dynamics,
traditional advertiser ratio around 50/50 right now, we
NCH, The Magazine Advertising Bureau, and Nielsen
feel it is closer to 55-70% dot-com. Our analysis differs
Media Research. Below, we describe in more detail, the
from other research in that we are counting dollars of
branding studies that have been conducted on Internet
advertising, as opposed to advertising impressions or
advertising.
numbers of companies. We are also separating the various
divisions within companies (for instance, we count MSN as
Study #1: The Internet Is Capable of Branding
dot-com, but Microsoft as traditional and
In probably the most in-depth study yet of the effectiveness
barnesandnoble.com as dot-com, but Barnes and Noble as
of Internet advertising, Dynamic Logic, 24/7 Media, and
traditional).
AdRelevance teamed up to provide insight into banner
advertising’s effectiveness.
Based on our analysis of AdRelevance’s list of the top
spenders on Internet advertising so far this year, we find
Exhibit 13
that seven of the top 10 advertisers are dot-coms.
The Effectiveness of Banner Advertising
Furthermore, 15 of the top 20 and 29 of the top 50 are dot-
Metric
Mean
Std. Deviation
coms. Interestingly, of the top 100 Internet advertisers, 45
Awareness
7%
0.18
are traditional companies. It is just that in terms of
Purchase Intent
2%
0.10
Recall
27%
0.15
spending, it is more skewed.
Interest
44%
0.20
Perceived Clarity
63%
0.19
We feel that special care needs to be taken in the
Message Association
20%
0.37
definitional aspects of dot-coms. For our purposes, we
Source: AdRelevance, Dynamic Logic, 24/7 Media
assumed that any company that gains a majority of its
revenues from offline sources is a “traditional”
Banner advertising was shown to increase brand awareness
company/division, unless the brand being advertised is a
by an average of 7%. The results carried a correlation of
unique online brand.
0.29 and a confidence interval of 0.05. Interestingly, brand
awareness is inversely related to the number of elements in
For instance, we listed Barnes&Noble.com as an online
a banner: the more cluttered the banner, the less likely
company because it is a separate entity that operates solely
consumers are to recall it.
on the Internet. On the other hand, we listed Microsoft as
an offline company as the vast majority of its business is
Banners were shown to increase message association (the
still from the traditional space. We listed MSN — The
ability to connect a message with an advertiser) by 20%.
Microsoft Network (Microsoft’s Internet presence) as an
Internet Direct Marketing & Advertising Services - February 22, 2001
Please refer to important disclosures at the end of this report.

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