(FORTUNE Magazine) – When Charles Strauss stepped up to the podium to deliver a speech at last fall's Internet World, the crowd seemed half asleep. Strauss, who is CEO of Unilever's U.S. operations, served up the verbal equivalent of Jolt Cola. Without warning, he harangued the Webheads in the audience for overhyping the wonders of online advertising. They could keep their banners, pop-up promotions, and assorted digital come-ons, he told them. Lipton tea, Elizabeth Arden cosmetics, and other Unilever brands would do just fine without their help, thank you very much. "We've learned a lot in a few short years," he said. "And we know that success on the Internet won't really come from what many of you are still trying to sell us."

It must have been sweet revenge for Strauss. For several years, dot-com executives had smugly suggested that Unilever's market share would dissolve faster than a bar of Dove soap under hot water if its brands weren't hawked on their sites. After all, the Internet was supposed to be the ultimate ad medium, the killer app that would eclipse newspapers, magazines, even television. But it's become increasingly clear that the online ad boom was largely a mirage, one created by the unfettered spending of the dot-coms themselves. Flush with venture funding and IPO cash, Internet companies had been only too happy to ring one another's Websites with flashing banners.

Those days are over: After growing at a compound annual rate of 103% to an estimated $8 billion last year, online ad spending in 2001 is expected to be completely flat. Companies that sell ads for large groups of Websites, like DoubleClick and 24/7 Media, have announced layoffs. Ad-dependent sites such as AngryMan.com and Pseudo.com are kaput. Yahoo, the nation's most heavily trafficked Website, has seen its stock fall from a high of more than $250 last year to little more than $30 today, in part because 90% of its revenue comes from advertising. In January the company warned that 2001 revenue growth would be minimal. America Online (parent of FORTUNE's publisher), less vulnerable since 61% of its revenues come from subscribers, has still been shaken by the downturn. And even Microsoft said in December that earnings were being dragged down by sluggish ad sales at its Internet portal, MSN.

So it should come as no shock that ad-hungry sites are zeroing in on old-economy guys like Strauss. Dot-com executives who used to lecture to him now need him for their new pitch to Wall Street. They say their future profits will come not from other Web outfits but from FORTUNE 500 companies. Dr. Koop's out; Dr Pepper's in. It's easy to see why: In 1999 the nation's top 100 advertisers spent a total of $25 billion on television, $7 billion on magazines, $6 billion on newspapers, and $481 million on billboards. But, according to Advertising Age, they spent a mere $364 million on the Net, less than 10% of the total $4.6 billion spent on Web ads that year.

But if the dot-coms are expecting the FORTUNE 500 to ride to their rescue, they're in for a surprise. Sure, overall ad spending in the U.S. is slowing--it's expected to grow just 5.8% this year, compared with 9.8% in 2000. But what should really have Websites trembling is that big advertisers have suddenly gotten their heads around the Web. And the more they embrace it, the less inclined they seem to throw heaps of money at portals, ad networks, and other stand-alone sites. The new-economy companies are watching in alarm as old-economy advertisers reinvent their medium--and bypass them in the process. Says Michael Browner, executive director of media and marketing for GM: "We may actually spend less next year on the Internet because we're getting smarter about how we use it."

Companies like Nike and Kimberly-Clark are increasingly eschewing banner ads to build their own Net-based programs that raise brand awareness or drive traffic to their sites. Miller Brewing crafted e-mail software that allows users to signal their friends when they're headed out to the corner bar. (The software's slogan: "When the light is blinkin', get ready to go drinkin'!") More than 90,000 people have now downloaded the program. In October the Sci Fi Channel used its airtime to hype its Website promoting its documentary on the making of the Blair Witch Project sequel. It placed a few cheap ads on fringe Websites and used its own e-mail list (free, of course) to pull in almost 500,000 hits in three weeks. The network's ad agency, TBWA/Chiat/Day, didn't even think about approaching AOL or Yahoo. "We really didn't want to," says Doug Jaeger, TBWA's interactive creative director. "We wanted to make it an underground thing." Absolut Vodka, which seems determined to plaster its bottle-shaped ads on every free space in America, has almost completely avoided online advertising. Instead it devotes its budget to homegrown sites like Absolut DJ, where visitors mix dance cuts with musical samples provided by turntable notables like DJ Spooky. The site's even spinning off a successor in the next few months--Absolut Director--that will allow users to cut their own videos from an array of snippets.

In each case, ad dollars that could have been spent at a portal or content site have stayed almost entirely in-house: no competing for eyeballs, no desperate pleas to CLICK HERE!, no trying to get a message out in a banner's 468 by 60 pixels. According to AdZone Interactive, a New York firm tracking online advertising, more than two-thirds of the FORTUNE 500 didn't spend any money on the Web as of October. If those potential advertisers follow their early-adopting peers, things might only get worse for ad-hungry sites. "The outlook could be gloomy," says David Halprin, a senior analyst at eMarketer.

This isn't quite what the Internet veterans envisioned at the birth of the Web. Over the years, leading Internet companies insisted that they would be the primary beneficiaries when corporate America woke to the virtues of Internet advertising. Consumers, after all, were adopting the Internet faster than they had radio, TV, or cable. Traditional advertisers would surely pay a premium to the big portals and content sites, which were attracting upscale consumers with a weakness for the latest in expensive high-tech gadgetry. Accordingly, the number of sites seeking ads exploded-- from 1,033 in 1997 to 6,206 in the third quarter of 2000, says research firm AdKnowledge.

So why didn't the FORTUNE 500 companies come begging? It wasn't that major advertisers thought Internet advertising didn't work; they just wanted to do it at their own pace. "When I went to [Internet] conferences a year and a half, two years ago, people made me almost feel guilty," says Tony Romeo, chairman of Unilever North America's interactive brand center. "You know, 'You guys are awfully slow.' In fact, we were putting significant amounts of money into this."

The more big advertisers explored the Web, the more their interests didn't seem to square with those seeking their money. First, the medium wasn't delivering. In the past six years, the average click-through rate--people who actually click on an ad to go to a site--has tumbled from 40% to a measly 0.5% today. Worse, the Net proved good at direct marketing but poor at brand building. Pushing a consumer's emotional buttons is easier to do in a 30-second television spot than with a static Yahoo banner. When big advertisers tried to break out of the banner format, they were rebuffed. Websites complained that sophisticated ads with animated images crashed machines and alienated viewers. That response alienated advertisers. "Quite frankly, some of the biggest players have been the most reluctant," says Vivienne Bechtold, director of interactive marketing for Procter & Gamble. "So we have chosen to spend our money in other places."

Increasingly, that place is home. In 1999, when Miller decided to retool its Miller Lite campaign, it avoided its usual route of buying banner ads or sponsoring sports sites like ESPN.com. "What we needed was something different," says Scott Bussen, a Miller spokesman, "something that would reinforce the brand image." In the course of long skull sessions at the company's Milwaukee headquarters, the Miller marketing team and Red Sky Interactive, its online advertising agency, decided their message--that Miller Lite was all about camaraderie--couldn't come through in a banner or pop-up. That led to the "beer pager," the free program Miller devotees load with friends' e-mail addresses to quickly send a message when they feel a thirst coming on. Not only has it been good branding, but the program has enabled Miller to expand its customer base. When a user enters a friend's address, the company sends out a note asking newcomers to download the software. And almost 50% of people who downloaded the pager have agreed to receive e-mails about other Miller promotions. No wonder the brewer is feeling pretty confident about the Net these days. "We're still running some banners," says Denis McGarry, vice president of e-business and corporate strategy, "but we're really looking for a more extended interaction with our customers. That's what we get here."

Kimberly-Clark had a similar epiphany. For several years, the maker of Huggies diapers had a portal sponsorship deal with iVillage.com. But at the end of 1999 the company reevaluated its Web strategy with its ad agency, OgilvyOne, and made a drastic change. Instead of advertising on iVillage, Kimberly-Clark bought cheap content from iVillage, Salon.com, and other dot-coms and used it to create a portal of its own: Parentstages.com, a Website aimed at young parents. "This is a lot more targeted than AOL or Yahoo will ever be," boasts Mark Scott, the company's marketing director for North American infant-care products. But doesn't Kimberly-Clark need banners to publicize its site? No, says Scott. The company gets its traffic by advertising Parentstages.com on its diaper packaging and television spots.

Nike has also decided to go it alone. Most recently it built an elaborate site for Nike Shox, its new line of running and basketball shoes. The site features animation that, in one case, promises to allow you to "Experience basketball through the eyes of Vince Carter on Nike Shox." Nike says the site has been tremendously popular, drawing more than 150,000 hits a week. Yet it has attracted those Nike lovers without paying for any online ads. "We don't really believe in banners," sniffs Beth Gorny, a Nike.com spokeswoman. Instead, Nike employees talked up the Shox site on independent chat rooms, like Niketalk.com.

And when the old-line advertisers do decide to use a banner, they're finding they can be more demanding. For one thing, they are asking for--and getting--lower prices. The average cost of reaching 1,000 people on the Web has fallen today to $33.64, from $37.21 in 1997. And that doesn't include the average 33% discount that sites typically give customers. "We never expected to see the Web pricing we see today," says Jonathan Adams, senior partner at OgilvyOne in New York. "But none of us who are still buying are disappointed."

Discounts aren't all the FORTUNE 500 have asked for. Traditional advertisers are also flexing their new muscles by seeking "pay for performance" deals: They pay only if customers click through to their sites and buy something. "Pricing has to be more reflective of actual sales,'' says P&G's Bechtold.

Naturally, Websites hoping for traditional ad dollars aren't taking all of this lightly. For starters, they're making amends to Madison Avenue. Many ad agencies are still peeved by the portals' habit of doing end runs around them, cutting deals directly with their clients. So both AOL and Yahoo have enlisted executives with deep roots in the advertising world to act as goodwill ambassadors. "They are all sending these teams out to all the agencies to say, 'Hey, things have changed. We're really nice guys now,'" says Andrew Pakula, president of Orb Digital, an ad firm in New York City.

They've had some success. Yahoo's "fusion marketing" campaign, headed by Murray Gaylord, the former executive vice president of public service group the Ad Council, scored Pepsi as a client. Consumers enter Pepsi bottle-cap codes on a special Yahoo page and win points toward the purchase of items like CDs and DVDs. Myer Berlow, AOL's interactive marketing president, points to Volvo's recent decision to promote its new S60 exclusively online and only on AOL. The exclusivity ended in January. And while some dealers reportedly grumbled, Volvo insists that it would try a similar launch again. Yet Berlow complains that AOL's FORTUNE 500 clients don't spend as freely as dot-coms.

They likely never will--not until the big portals and ad-dependent sites figure out a new hook. These old-economy companies have found their own way to get their message out online. Now it's the dot-coms' turn to play catch-up.

FEEDBACK: dleonard@fortunemail.com