How Web Advertising Works

In the Beginning: Banner Ads

When the Web first started being a "commercial endeavor" around 1997 or so, thousands of new sites were born and billions of dollars in venture capital flowed into them. The sites divided into two broad categories:

E-commerce sites - E-commerce sites sell things. E-commerce sites make their money from the products they sell, just like a brick-and-mortar store does.
Content sites - Content sites create or collect content (words, pictures, video, etc.) for readers to look at. Content Web sites make their money primarily from advertising, like TV stations, radio stations and newspapers.

In the beginning, "advertising" on the Internet meant "banner ads" -- the 728x90-pixel ads you see at the top of almost all Web pages today (including this one). In 1998 or so, banner advertising was a lucrative business. Popular sites like Yahoo could charge $30, $50, even $100 per thousand impressions to run banner ads on their pages. These advertising rates provided fuel for much of the venture capital boom on the Web. The idea was that sites could start up and increase their page impressions to make easy money from banner ads. If a site could generate 100 million page impressions per month, it could make $3 million per month with banner ad rates at $30 per thousand impressions.

Where did numbers like $30 or $50 per thousand impressions come from? That's what magazines typically charge for full-page color ads. The Internet took the same payment model and applied it to banner ads.

At some point, advertisers came to the conclusion that banner ads were not as effective as full-page magazine ads or 30-second TV commercials. At the same time, there was an incredible glut of advertising space -- thousands of sites had a million or more page impressions available per month, and companies like DoubleClick began collecting these sites into massive pools of banner-ad inventory. The economic principle of "supply and demand" works the same way on the Web as it does everywhere else, so the rates paid for banner advertising began to plummet.

Let's look more closely at what determines banner ad rates.