Bill Gross, a Pasadena, Calif., businessman, has a great moneymaking idea. His firm, Free-PC.com, will ship you a free 333-megahertz Compaq computer. He'll also give you free Internet access and a free maintenance contract. In return, all he wants is two little things. Your soul and a pound of flesh? No, just your eyeballs and a bit of demographic information. "Eyeballs" is Webspeak for the number of people who see a Web page--and, presumably, any ad that is on it. If a Web page is served to 100,000 computers, that counts as 100,000 eyeballs, although literally it's more like 200,000, assuming two eyeballs per person.
Gross' company will place ads on a small portion of the screen as you use your free computer. And with the information you give him about your income, tastes, and so on, he will be able to sell you to advertisers whose products and pitches are aimed at your sort of person. The more an advertiser knows about you, the more it is willing to pay to reach you. On the Internet, such information is even more useful because it's easier to fine-tune who sees an ad. The ad you see at the top of this page may be different from the one your neighbor sees when she visits this same article. Bill Gross can send each of his free computer owners ads for precisely what he or she is most likely to buy. In this way Gross hopes to make back his costs and then some.
Of course, Gross is not the only one with this idea. The Web is full of sites that give away valuable stuff free in the hope of making it back in advertising. Slate, notoriously, for starters. And this practice is not unknown in other media, either. Television programming is still mostly free to the user. And even newspapers and traditional magazines don't begin to cover their costs from what readers pay. Those readers are heavily subsidized by advertisers hoping to sell them stuff. What's notable about the Web is the profusion of free offerings that go way beyond mere editorial content filling in the space between ads. There's an online store called Onsale atCost selling computer equipment at the true wholesale price. Onsale atCost may be the only store in the world to hire PricewaterhouseCoopers to document that it is not going to make a profit. CBS's SportsLine.com actually pays you to get sports scores from their site. The site counts the number of times you visit SportsLine, and frequent users are given T-shirts and sunglasses. Each time you visit you are even entered in $1 million prize sweepstakes. And AllAdvantage.com promises to pay you up to $20 per month for downloading an application that displays ads in the corner of your screen. It'll pay you even more if you can convince your friends to sign up as well.
eFax.com will give you a free fax number and allow you to receive faxes by e-mail--free. Everyone wants to give you free e-mail. Free personal address books and calendars, free mapping services, free personalized news and weather--all are available in exchange for your eyeballs and a bit of information about yourself, either asked for explicitly or gleaned from what you reveal in using the free service.
Which raises the question: How much can your eyeballs possibly be worth? Suppose I could insidiously find out enough about you to influence every purchasing decision you make. Suppose I could promise that every ad I sold you would go straight to your spending reflex. What could I sell that power for?
Let's do some math. Newsweek says Gross pays $600 for the computer. Add $100 a year for the Internet connection and the service contract and assume the computer has a usable life of two years. He's paying $400 per year for your attention. How on earth is he going to make this back? Well, suppose some Chiat/Day ad wizard can create a series of banner ads, which, by blinking in the corner of your screen, compel you to go out and buy $400 worth of stuff. It's hard to imagine, but it's not crazy. But $400 of sales isn't good enough. Hewlett-Packard isn't going to pay $400 for your eyeballs if you're just going buy one $400 Hewlett-Packard printer. Hewlett-Packard needs $400 in profit, which may mean 10 or 20 printers. That is, Gross must convince his advertisers that they'll get $400 of profit per customer, which means, say, something like $4,000 in sales. Each year. Just from you. And just because of his ads.
Now consider that advertisers spend an estimated $100 billion plugging goods and services to America's 100 million households. In other words, advertisers, as a group, think that affecting the purchasing decisions of an entire household of average eyeballs is worth $1,000 per year. That's for all the ads you see in every medium, from television to billboards, in the course of a year. Bill Gross is betting that his ads alone, aimed at just one person, will be worth almost half that amount. Maybe he will manage to find bigger spenders. Or maybe he'll be wildly more successful in affecting their decisions. Or maybe he's nuts.
His task will be easier if his $400 doesn't have to come out of what advertisers are already spending but by convincing them that it's worth spending more. That's where the demographic information comes in. This is not a new concept, of course. John Wanamaker, who built a department store empire in 19th-century Philadelphia, once said, "Half the money I spend on advertising is wasted ... I only wish I knew which half."
T argeting is a solution to Wanamaker's problem. You can deliver Lexus ads to affluent customers pulling down more than $100,000 per year. To less fortunate customers, you can deliver, say, Hyundai ads. To get a sense of how valuable targeting is to advertisers, the New York Times-- which makes you give demographic information in order to register for the site--charges four cents for a banner ad that's shown to everyone and six cents for one that is targeted. In other words, targeted ads are worth 50 percent more. Yahoo! can tell what your interests are by the search you're entering. In writing this article, I entered "Lexus" into Yahoo! and, sure enough, a banner ad for a Lexus popped up above my search results. And when I entered "New York Times" I got a banner ad for the New York Times. Both Lexus and the Times pay for this service. On average, these targeted search engine ads cost 50 percent more than ordinary bulk ads.
But is the Internet so miraculous an advertising vehicle that Gross will be able to siphon off $400 per person from total ad spending of $1,000 per family--or persuade advertisers to spend an additional $400 to reach each of his customers? This isn't so obvious. After all, targeting is not unique to the Internet. A Lexus ad in Car and Driver or Fortune is pretty well targeted at affluent people who like fancy cars. And ads on the Internet, at least so far, lack oomph. A banner at the top of a Web page just isn't the same as a luxurious two-page color spread.
Targeting may increase what advertisers will spend per eyeball, but it also reduces the number of eyeballs they have to pay for. Unless Wanamaker was willing to pay double for reaching the right half of the people, his total ad spending would go down and not up. The apparent going premium of 50 percent for a targeted ad on the Internet suggests that Internet advertising may be as likely to reduce total ad spending as to increase it.
Last year, advertisers spent $2 billion on the Internet, compared with $35 billion spent on broadcast TV and $10 billion spent on cable. That's 2 percent of the $100 billion total spent on ads in all media. The Internet ad market is growing at two or three times the rate of any other medium. So suppose advertisers direct one-fifth of their resources onto the Internet. That would be a tenfold increase in the Internet's share. And suppose the total market for advertising doubled. In this highly optimistic scenario, Internet ad spending would be $400 per household. In other words, Bill Gross could break even--provided he was the only advertiser on the Web.
Eyeballs are worth money only because they are attached to wallets. And the size of the wallets is a strict limit on the value of the eyeballs. So have I just argued myself out of a job by mathematically disproving the theory on which my paycheck is based? Not at all--or at least I don't think so. Free magazine articles are one thing, free computers are another. Exchanging stuff for eyeballs makes sense as long as the cost of providing the stuff is less than the value of the eyeballs to advertisers. What it has cost Slate to provide this article by me can be the basis for a very profitable ad-based business. Take my word for it.