The UK is almost two years ahead of the US in terms of online advertising. At least, that's the conclusion of Terry S. Semel, chief executive of Yahoo!, in a recent New York Times article. The situation has arisen mainly through the underlying growth of broadband in the UK. Alan Patrick gives his anlaysis.

During 2006 broadband penetration increased from about 40 per cent to 50 per cent. In addition, the time people spend online has risen to 23 hours a week and online spending has risen from about �800 per head to �1,100 per head.

As companies have followed customers online, internet advertising has grown rapidly. By the end of June 2006 it was up from 8 per cent to 10 per cent of all UK ad spend and is expected to be nearer 14 per cent by December 2006 - the highest ad spend per head in the world.

What a difference a year makes. Last year, an interviewee on an Interactive Online Advertising project we were working on noted that the UK advertising industry's response to the broadband "New" new media was "like a rabbit caught in the headlines of an oncoming truck"

The more detailed trends we predicted were:

1. The overall internet pie is bound by time (or 'attention' as it has become fashionably named), and spend - thus as online advertising audiences grew, traditional media revenues would shrink. The cost structures of traditional media meant that even small shifts in advertising revenues would have huge impacts on profits and thus the industry structure.
2. Online advertising models would grow over other - mainly subscription - models, because most customers want to consume higher value content than they are prepared to pay for. (This has largely been borne out, to the extent that the emphasis is possibly too far down the advertising route now.)
3. Despite the known problems with existing online and "old media" adverts, new formats were still unproven, so 2006/7 would be a period of major experimentation. Experimentation came in spades, such as the rise of Second Life as an advertising vehicle. Evidence of what works effectively (the "Good Enoughs") and what does not, have accumulated. Pop-ups have declined.
4. Customers still wanted trusted information about products and services, but traditional advertising were not best placed to give it. Hence, social media as a method of advertising gained centre stage in 2006 - although this has possibly gone too far now, as early social media sites get "gamed".

The other key issue in 2005 was - and remains - potential values per advert, and the charging mechanisms used to price adverts (cost per thousand, cost per click, cost per acquisition): what might occur as adverts became more personalised, and moved onto mobile? At Broadsight, our view was that there would start to be premium pricing for services that could show firm evidence of significantly higher levels of take-up efficiency (as bid prices on Google have shown). And that in fact, targeted, interactive advertising has to show higher efficiency, otherwise the increased costs of production make it uneconomic.

So, what of 2007? The four trends (above) will continue, driven by the continuing needs of advertisers to follow their customers' move online.

There will be a continuing movement from traditional to online media, forcing painful restructuring of the old media industry - which will start to look more like new media. Hybrid advertising and paid-for models will begin to emerge, mainly via subscription on the web, and sponsorship or pay-as-you-go over podcast, vodcast and mobile. "Good Enough" formats will also emerge - but only temporarily, as integrated technology that massively reduces the cost of highly personalised, interactive advertising media will start to emerge by end 2007. And, it goes without saying that social media will be an increasingly important element in online advertising (we suspect it will become the main "good enough" platform for interaction and personalisation for 2007).

As for emerging trends - it will become clear that not all social media is equal. The rush to colonise the valuable areas with "owned" metadata - the "Metadata Wars" - will intensify. Ad pricing in this area will be high, whereas in other areas it will fall to much lower levels as advertisers start to understand which 20 per cent of cyberspace is worth 80 per cent of their spend. It is also increasingly urgent to be able to quantify and analyse advert effectiveness, what with the widely varying hit rates, attention levels etc being quoted today. This will drive the way adverts are charged.

Lastly, 2006 was the year that web video made the internet buzz. At the beginning of 2006, to doubt IPTV was heresy - now PC based television is here. This will change the structure of the television, film and internet industry because of sheer scale, and wider dispersal in new value chains. Advertising will be in for "interesting" times as established media companies lose their shirts and heads. (Literally in the BBC's case it seems.)

About the author
Alan Patrick is a co-founder and principal at Broadsight . For a free summary paper of Broadsight's 2006 Online Advertising Review, go here.

Copyright Broadsight Limited, 2006.