Network: The search for profits heats up as Web advertisers look for better results

At least half of the $171m spent on advertising on the World Wide Web last year went to search engine companies. Yahoo! led the way with $19m in ad revenues, Infoseek took $15.1m, Excite $14.8m and WebCrawler an estimated $8.5m, while Lycos reported $4.5m of ad revenue for the year to 31 July 1996.

But is anyone really making money on the Web? Matthew Kinsman, associate editor of the Electronic Advertising & Marketplace Report, thinks not. "Companies such as Yahoo! are reporting their first profits [just pounds 55,000 for the last three months of 1996], but compared with the long-term investments that have been placed in these companies, it really hasn't begun to even out," he says. For example, Excite earned money from 370 advertisers, including Disney, Kodak and Ford, but still lost $43.1m, including the $4.3m it spent on buying WebCrawler from AOL and a further $5m spent on its own TV, print and billboard advertising in the US.

"The search engines dominated Web advertising in 1996 simply because first-time advertisers didn't know where else to run an effective campaign on the Web. In 1997, I think advertisers will continue to use the search engines, but you'll see much more ad distribution among targeted sites, such as magazine publishers," says Mr Kinsman.

The attraction of search engines, according to Louis Monier, senior consulting engineer at Digital, is that "they offer the only true compelling content on the Web, certainly the only one which will never turn unfashionable".

Digital, which owns AltaVista, hopes to sell shares in the search engine company, which started carrying ads only in December. Ilene Lang, AltaVista's CEO, believes it will be one of the biggest earners of ad revenue on the Web. However, it also sells software products based on AltaVista technology, mainly for use on Intranets and for corporate database searches. The search engine site helps to promote this and Digital's fast servers.

Nick Smith, a consultant at KPMG, feels that the key to search engines' appeal to advertisers is their ability to target people by what they are looking for. This will be further enhanced by the proliferation of specialised search engines, such as Yahooligans for young people, the city sites being set up by Yahoo! and Lycos, with their ability to generate maps of requested businesses, and national versions of the big engines. The more focused they are, the easier it will be to sell ad space. "The Internet is global, but advertising isn't," he points out.

Gloria Villagomez, international business development director of Four11, a people and address finder, agrees. To attract advertisers, Four11 allows them to target users by demographics, interests, other characteristics such as high-level domains (edu, org, com), browser type, or server. Rather than compete with the Web search engines, it has also formed partnerships with Yahoo!, Infoseek and others, and is talking to several UK sites.

Deja News, which serves about 2.2 million page views a day, is also attractive to advertisers because it displays material from within its own pages instead of sending searchers elsewhere. Humphrey Marr, Deja News's director of business development, calls it "a very targeted method for ad placement", which could have, say, a golf club banner on all articles in the rec.sports.golf newsgroup.

This should appeal to all sorts of businesses, but Nick Smith points out that advertising on the Web is still very insular. "If you look at the top 10 spenders, about half a dozen of those companies feature in the top 10 earners. They spend with each other." He feels they need to go beyond the Net to grow.

Infoseek's strategy is to set up partnerships with local content providers, such as newspapers, to expand its service worldwide, as it has done with UK Plus. It has also set up sponsored content sections, Infoseek Spotlights, on its directory pages, where businesses such as Dow Jones Business Directory, Travelocity and Sports Illustrated can display a sample of the content found on their sites.

Several search companies are developing new services that consumers and businesses may pay for, but the freebie culture of the Net may hamper them. "I doubt anyone can create an effective long-term subscription service targeted to consumer users, but if some of the search engines do change their content to focus more on business-to-business users, then it is a possibility," says Mr Kinsman. "I think an option that makes more sense is something like the Infoseek Network, which is offering to represent smaller publishers selling advertising."

Infoseek started as a subscription service, but is now free. Part of the problem was inadequate billing systems, which Steve Grady, Infoseek's marketing director, says are now being developed. He agrees that the Internet isn't ready for it yet, "but it's getting there, especially for business content". He hopes to be able to offer a commercial service later this year for people who need specific information fast.

Both Mr Marr and Mr Monier believe search engines will remain free, but Mr Grady believes there will soon be only a few major players: Yahoo!, Excite, Lycos, Infoseek, and, possibly, AltaVista. A longer-term threat facing search engines is that they could be replaced by sophisticated intelligent agents sent out by computer users. Such software isn't available yet, although Mr Grady says that "the premise is great".

But Mr Monier thinks they would take a lifetime to find information by themselves. "The first stop of these 'agents' will be a search engine such as ours where they will make a few queries to get a starting-point. Then, and only then, will they show their paces by selecting the right sites, fetching the right pages and analysing them properly. The quote, 'The Web is only as good as its index' will remain true in the future," he says.