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Running ads on Web sites used to be for big companies with big advertising budgets. Now that it’s free, it’s anybody’s game.

Most start-up founders live off credit cards and macaroni-and-cheese dinners and can only dream of treating their employees to a grand evening out. Not Bill Lohse. Last June the chairman and CEO of SmartAge shepherded 22 employees of his wet-behind-the-ears company and their guests to a gala performance of Carmen with Denyse Graves at the San Francisco Opera, followed by a private dinner at Vivande, a tony restaurant nearby.

The celebration marked the official launch of SmartAge, a full-service shop for small companies eager to lure eyeballs to their Web sites. Lohse, 47, a tall, long-jawed man who is equally articulate on the subjects of niches and Nietzsche, says he doesn’t care whether his brainchild brings him additional fortune. Lohse, after all, is already a multimillionaire, having founded or invested in several successful companies, including TimeLine (now part of Symantec) and Knowledge Adventure. He has also achieved a measure of celebrity as the former publisher of PC Magazine, the fattest and richest of the computer industry’s publications.

By all rights, then, Lohse should be enjoying an early retirement in Tuscany, indulging his passion for Italian opera. But he chose instead to spend $750,000 of his own funds to “help small and growing businesses make money.”

Lohse is talking about Internet money, and at the center of his plan are banner ads. Banners are one-by-five-inch digital billboards that companies pay to place on other companies’ Web sites; when a visitor clicks on a banner, he or she is delivered to the advertiser’s home page. According to the Internet Advertising Bureau, in New York City, banners and other forms of Web advertising are becoming big business, with companies buying $423 million worth in the second quarter of 1998–a 97% increase over the second quarter of 1997.

So far, most of those millions have come from large companies with plush advertising budgets and hefty investments in their own Web initiatives. That’s not surprising when you consider that the cost of running a banner ad on a popular site like CNET is between $25 and $75 per thousand “impressions”–the number of times the page is seen by surfers. Advertisers on CNET can run through all those impressions in a few hours, and at those rates small companies–particularly those selling to local or regional customers–may get more value from advertising in their local papers. In addition, companies buying banners generally work with agencies that create their ads’ content and design, and with consultants who help them plot an Internet strategy. Small-business owners, occupied as they are with payroll and cash flow, don’t have that luxury.

Which is a shame because, according to Lohse, banner ads can be very good friends to small companies. Banners are “a great way for small companies to drive traffic to their sites and then to turn that traffic into real revenue,” he says. Lohse is seconded in that opinion by Vint Cerf, an Internet guru and SmartAge investor. “Small businesses need all the advertising leverage they can get,” says Cerf, who is MCI WorldCom’s senior vice-president of Internet architecture and technology. “It’s like the wonderful quote from Ted Turner: ‘Early to bed, early to rise, work like hell, and advertise.'”

It is here that SmartAge comes in. Like its chief competitor, LinkExchange (recently acquired by Microsoft), SmartAge is building an artificial economy of banners, using itself as the gathering place and service hub. Say that Joe’s Tires has a Web site it wants to promote. Joe contacts SmartAge and signs up for the company’s SmartClicks banner-exchange service. SmartAge gives him some tools with which to build a banner ad and identifies other SmartAge clients likely to drive traffic to Joe’s site–Bill’s Auto Body, for example. The vendor then plops Joe’s banner on Bill’s site and Bill’s banner on Joe’s site. The service doesn’t cost Joe or Bill a penny.

Although SmartAge collects no money for playing matchmaker, it does get to put its own banners on both Joe’s and Bill’s sites, driving customers to its own site, where it can sell them additional services. Here economies of scale kick in. SmartAge publishes about a million ads per day and boasts 125,000 registered users. That translates into a torrent of visitors to SmartAge’s site, and an ever-increasing number of those visitors (the company declines to be specific) purchase some of SmartAge’s other services, attracted by the low! low! low! prices that all that volume makes possible.

Cerf describes the banner exchange as “a built-in value generator,” meaning that each sale of a service generates demand for another service. Say a small-business owner journeys via a banner ad to www.smartage.com. Once there, she decides to spend $6.95 a month for something called SiteWatch, which monitors the performance of her site, alerting her if her server slows down or if the number of hits falls below a predesignated floor. If those hits do decline, she may conclude that it’s because her site is too hard to find. But look, SmartAge is there for her again, this time with a service called Submit that will register her at no charge with seven major search engines. (Submission to 400 additional engines and directories costs $9.95.) Once she’s listed everywhere, the customer becomes a prime prospect for SmartAge SiteRank, which for $6.95 a month tells site owners where they rank on all those search engines and how they’re doing relative to the competition. “There’s a certain stickiness to our services,” explains Johnathan Robinson, SmartAge’s vice-president of sales.

The many-eggs-in-one-basket approach is fine with Richard Fascia, a former policeman and hostage negotiator from Rhode Island who consults with businesses on workplace violence, a service he markets on www.jeopardymanagement.com. “If I had to create the art, find out how to get it in the right places, do the analysis of where it goes and who sees it and so on, it would take me days of solid work, and I probably wouldn’t get it right the first time,” he says. “With SmartAge the whole process is very simple.”

SmartAge’s Kinko’s-like business model also appeals to analysts, some of whom have hailed the company as an incipient giant of the Internet. “I’m pretty impressed,” says Jack Staff, chief economist at Zona Research, in Redwood City, Calif. “Small businesses need to be able to market on the Web without a lot of overhead.”

Certainly, SmartAge gives every appearance of a company that expects to succeed. Far from the madding crowd of Silicon Valley, its two-story brick headquarters nestles in a suburban San Francisco neighborhood where housing prices start at $700,000. With its wood paneling, dusty-rose carpets, and brass fittings, the office looks more like a law or psychiatry practice than a high-tech start-up. That sense of maturity is reflected in SmartAge’s 37 employees, most of whom are several years older than those stereotypical Stanford grads who hunker over business plans and dream about retiring at 40.

But even amidst this placid elegance, the tempest of Internet business can be heard rattling the windows. One challenge to SmartAge is simply the rapid march of technology, which by 2002 will make it possible for Web-site owners to do things like use code embedded directly into banners to track viewing patterns and responses, according to Boston-based Forrester Research. Such advances would make some of SmartAge’s existing services obsolete, but Lohse pledges to stay two steps ahead of technological change, offering whatever services small companies need to exploit the Net’s developing state of the art.

A bigger problem for SmartAge than the march of technology, however, is the so-far tepid pace of banner-ad acceptance among consumers. Despite efforts to jazz them up with animation and other special effects, banner ads frequently fade into the digital woodwork. A study commissioned by Advertising Age magazine revealed that 49% of Web users simply ignore banners, compared with 39% last year. “Most people don’t look at them,” concedes Staff. “And the revenue [through increased sales] that actually comes through them isn’t phenomenal.”

That revenue is also tough to measure. Large companies running sites on in-house servers can spend as much as $50,000 a year monitoring impressions and “click-throughs” (when a site visitor clicks on an ad) using services such as NetGravity. Even then they can’t track purchases back to specific banners. Of course, the same thing can be said of traditional media, such as print advertising. But the technological glory that is the Web was supposed to excel at detailed response measurement. “Ad measurement on the Internet is a mess,” Forrester reported last year. “Hyped expectations, a lack of agreement on standards, technology obstacles, and a fragmented ad-delivery process has hampered the ability of media buyers and sellers to track ads.”

Given those problems, the fact that SmartClicks is free makes placing ads if not a positive boon at least a low-risk proposition. But then there’s the flip side: people who do believe in the effectiveness of banners may disdain ad exchanges on a you-get-what-you-pay-for principle. “I don’t think banner exchanges are very good,” says Jonathan Mizel, publisher of the on-line marketing newsletter Cyberwave.com. Although Mizel is a SmartAge customer and has used its SmartClicks exchange, he prefers to pay for ad placements because sites that sell space also guarantee viewers. “Banner exchanges are a great place to test your banner, but when you roll out a campaign, you’re better off purchasing ads directly,” he says.

Although Cerf is a believer in free exchange, he recognizes that Mizel’s sentiments may be widespread. He argues that SmartAge can help banner ads “develop into a profitable medium” but says it “still remains to be seen whether the business model matches the behavior of users and companies seeking a Web presence.” With that in mind, SmartAge is hedging its bets by selling banner packages that promise to deliver a minimum number of eyeballs to advertisers.

For those who prefer the free road, success in a banner exchange boils down to three rules: make sure your ad is engaging, swap with sites that complement your business, and don’t expect the moon.

That approach has worked for Deborah Edlhuber, owner of Prairie Frontier, in Waukesha, Wis., which sells wildflower and prairie-grass seed. Edlhuber erected a Web site a year and a half ago, chiefly as a marketing vehicle. Last May she contracted with SmartAge competitor LinkExchange to place her self-created ad on several dozen gardening and photographic sites. Today www.prairiefrontier.com attracts up to 1,700 hits a day, many from visitors clicking over from Edlhuber’s LinkExchange partners. “They definitely bring people to my site, and I can track the click-throughs,” she says. “But it’s still hard to say how much business I get from them.”

Christine McCarthy, founder and president of San Francisco start-up Cordpack Inc., has a similarly practical attitude. Her company, which manufactures carrying cases for laptop cords, put up a Web site in June. With only a small budget for the site, McCarthy relies on SmartClicks to advertise. “We get a steady flow of traffic–a few hundred hits a day,” she says. “It keeps up the momentum while I’m caught up in other areas of the business. At least I know I’ve got something out there. And anything we get from them is gravy.”