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Attacks chill online ad market

Media stocks get pounded as the United States declares war on terrorism, but some advertisers and analysts say it's unclear whether the damage will delay long-awaited recovery.

Online and traditional media stocks were pounded last week as the United States declared an open-ended war on terrorism, but some advertisers and analysts say it's unclear whether the effects will delay a long-awaited recovery.

Media companies including AOL Time Warner, Viacom, Walt Disney and Yahoo saw double-digit declines the week after the terrorist attacks Sept. 11, when hijacked commercial airliners were used to destroy New York's World Trade Center and damage the Pentagon in Washington, D.C.

The attacks brought record audience numbers to online news outlets, but short-term revenues declined as some publishers and marketers temporarily suspended advertising.

Analysts warned that the prospects of lasting conflict could lead to a cutback in marketing budgets, further dampening a sector that has been suffering from economic weakness for months. But others said the signs are brighter for online media, which may be poised for a rebound.

"Nobody's backing away from their buys or cutting spending. They're keeping their goals on track," said Jerry Quinn, media director for online ad agency iTraffic.

The financial health of Internet advertising is contingent on the industries spending the most online. Those include retail, Web media, financial services and travel, according to recent data from AdRelevance, a division of research firm Jupiter Media Metrix.

online advertising chart Already, some travel companies including Microsoft's Expedia and Hotwire have pulled advertising from mainstream and online media. Hotwire spokeswoman Amy Bohutinsky said the company pulled ads from radio airwaves and online outlets immediately after the attacks, postponing campaigns "indefinitely" until the company feels it's appropriate to advertise again.

"We didn't feel they were appropriate now, and we don't want to offend anyone by encouraging people to buy travel," Bohutinsky said.

But other key sectors, especially related to technology, for now appear to be on track.

Companies such as Microsoft and Sony have offered no signs that they plan to adjust their online marketing budgets.

"It is important for the economic activity of this nation and the world to move forward whenever possible and appropriate," said a Microsoft representative, adding that the company does not plan to scale back its advertising efforts for its forthcoming Windows XP operating system or Xbox game console.

The company has earmarked $1 billion, including partner contributions, to promote its new operating system. It has slated an additional $500 million to promote Xbox, whose November launch has been delayed by a week. Microsoft did not reveal how much of that money would go to Internet advertising.

Sony Media Director Bob Gruters also said his company's advertising plans are unchanged as a result of the terrorist attacks but that it has already scaled back its advertising over the course of the year. Among the products released this year, the company has promoted Clie handhelds and Vaio Notebooks. Products planned for the 2002 fiscal year are expected to launch with full marketing and advertising support.

Gruters would not say how much the company plans to spend in total this year. He said the company has not started planning for 2002.

Living up to expectations
Even before the attacks, financial analysts had warned of a gloomy picture for Internet media stocks such as CNET Networks, publisher of News.com, in the last half of 2001.

"The bottom line is it's not good for the advertising market," Merrill Lynch analyst Henry Blodget said in an interview. "With an already weak and deteriorating advertising environment, this clearly has a short-term impact where the networks and online media companies pull ads off their systems. But this could potentially have a longer-term impact if consumer confidence weakens the economy."

Several factors, however, counteract the recent gloom and doom for Internet publishers over the long run. Although the terrorist attacks two weeks ago were unprecedented in the United States, historical comparisons to the Gulf War and the economic recession of the early 1990s show media stocks have rebounded in wartime and benefited from a surge in viewership, much like the Internet is experiencing now, analysts say.

Analysts drew parallels between the Internet and cable channel CNN, which became a lifeline during the Gulf War in 1990 and 1991. After ad-supported stocks hit the floor in October 1990, shares of Turner Broadcasting, which owned CNN, surged 13 percent on the day the missiles were launched into Baghdad in January 1991, Thomas Weisel Partners analyst Gordon Hodge wrote in a research note. Cable networks Turner and Viacom increased by 142 percent by the end of 1991. Meanwhile, newspapers gained 22 percent between October and January of that year.

But unprecedented traffic doesn't necessarily mean added revenues in the short term. During a time of crisis, most media outlets operate without commercials to ensure the public the swiftest delivery of news. On the Net, the same has been true.

Yahoo, for example, stopped running ads from its home page for a week. Online editions of The New York Times and The Washington Post published commercial-free news after the attacks and began showing public-service ads shortly afterward. Industries such as travel pulled their ads altogether out of sensitivity to the public.

"Despite online's surge in traffic (to news sites such as CNN and MSNBC), that traffic will not turn into ad dollars for online firms since sudden traffic surges like these are 'free' to advertisers," SG Cowen Securities analyst Scott Reamer wrote in a recent analyst report.

Many analysts expect third-quarter revenues to slide as a result. But they say the excess traffic could turn to sites' advantage in the long run.

Looking ahead
Before the attacks Tuesday, Thomas Weisel had cut its ad forecast for 2001 and 2002 on concerns about a recession. It expects advertising to decline by 2.7 percent this year and to increase 1.9 percent in 2002.

Although the outlook is unclear, some advertising executives say they are cautiously optimistic that the coming months will show renewed strength in ad sales.

"I'm seeing a lot of encouraging signs for next year," said Mark Stephens, media director of marketing firm Lot21. He said he doesn't expect the fourth quarter to be as robust as 2000 but noted that current clients are planning to spend more rather than less.

"People are planning on moving ahead. Some of the larger clients are more into planning for 2002, but there's no slowing down on that front," said Stephens, whose agency plans and places online ad campaigns for Bank of America, Adobe Systems, Palm and Seagate Technology, among others.

Still, advertisers remain cautious about upcoming ad budgets. Sony's Gruters said: "Right now we're not cutting campaigns. But call me every day."