The report, slated to be released this week, estimates that online advertising will make up more than 8 per cent of advertisers' total marketing efforts by 2004, accounting for about $22 billion in spending in the US. Currently, advertisers devote about 1.3 per cent of their overall advertising budgets to Internet ads, for a total of about $2.8 billion, Forrester says.

Based on interviews with 50 companies, most of which have a significant Web presence and including companies such as America Online Inc. and Yahoo! Inc. that have a big stake in the growth of Internet banner advertising, Forrester found that marketing executives expect their Internet spending to leapfrog that for Yellow Pages and magazines by 2004. That would leaveit trailing only television, newspapers and direct mail in popularity for ad spending.

Result-based compensation?

But the study found the news is not all good for the Internet-content providers who rely on advertising dollars as their main revenue source, or for many of the ad agencies creating online campaigns. The report notes that growing numbers of advertisers are likely to insist on paying content providers and ad agencies based on the number of people who actually click on an ad or buy a product, rather than the widely used current system of paying a flat rate per 1,000 banner ads placed on a site's Web pages. Right now, only about 15 per cent of online advertising is purchased on a performance basis; by 2003, that number is expected to rise to 50 per cent.

Many advertisers prefer performance-based systems, arguing that they help hold content providers accountable for delivering a specific target audience. Content providers generally oppose such systems because an unsuccessfulad-campaign-no matter the reason-would mean far less revenue for them than they receive from flat rates, which are guaranteed regardless of how effective the ads actually are.

Many traditional ad agencies also oppose being paid on a strict performance basis for much the same reason. ``There used to be an old adage that half of all ads worked, but advertisers just didn't know which half,'' says Charlene Li, the senior analyst at Forrester who wrote the new report. ``Now the advertisers are saying they can know which half works, and they're going to hold Web sites responsible for delivering the audience they said they could deliver.''

`Different medium'

Content providers could adjust to a performance-based system by demanding a higher level of revenue-sharing for any online purchases made through their sites, the report says. Or they could build rich performance incentives into their contracts with advertisers and find ways to meet them. But while persuading ad agencies to accept aperformance-based compensation system may be quite difficult, Li says, the momentum may make it inevitable.

``Ad agencies had to wake up to the fact that the Web is a very different medium from television in terms of the creative side of the business,'' she says. ``Now they're going to have to accept that the Internet will be very different in terms of how they make their money, as well.''

Still, with the cost per 1,000 banner ads dropping sharply in recent months, some advertisers say it doesn't yet make financial sense for them to switch to a performance-based pricing system. ``We're just not at the stage yet where we think that click-through is an appropriate method for determining payment,'' says John Bukovinsky, a spokesman for International Business Machines Corp, which spent about $50 million on Internet advertising in 1998.