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Morgan Stanley analyst bullish on Net advertising

Influential analyst Mary Meeker says online advertising spending "has nowhere to go but up."

SAN FRANCISCO--The online advertising industry is facing a bright future that will be buoyed by new tools and targeted ads, said Morgan Stanley analyst Mary Meeker.

"We think Internet advertising spending has nowhere to go but up," Meeker said Monday during a keynote speech at the Ad:Tech industry conference here. Meeker added that the Web is the most underutilized advertising medium, garnering only 3 percent of total ad spending in the United States, according to estimates.

But with eBay as a benchmark, she said, the most successful companies could benefit from an ongoing shift online. After all, eBay is in the business of connecting buyers and sellers, much like search-advertising giant Google. And eBay spends 62 percent of its advertising budget online, according to Meeker.

Both eBay and Google "are about increasing the user experience and also increasing the ability of the ecosystem to handle growth," she said. New tools to improve consumer usage and target ads will be the key to future expansion, she added.

Meeker, an influential analyst of Internet stocks who briefly came under fire during the dot-com bust for her optimism in reports, was a headline speaker during the three-day Ad:Tech conference, where all eyes are on the multibillion-dollar search business dominated by Google and Yahoo. Confidence is also building for display advertising as the Web continues to lure major brand advertisers. Online ad sales are expected to reach $9 billion this year, up from roughly $8 billion in 2004.

In an example of the merging of search and display advertising, Meeker pointed to Google's new video-search service. In the future, she said, people could use the service to find a clip of Tiger Woods' winning shot at the Masters Tournament. And if the content owners granted licensing rights, Google could charge $1 for video playback with tools from PayPal. In the best case, the customer might also be willing to watch a brief commercial before the clip, she said.

Yahoo's video advertising is already a promising prelude. The media company delivered 917 million streams in the fourth quarter of last year and 10 percent of those were paired with video ads, according to Meeker. "We think it's going to 50 percent with a compelling" cost per impression, she added during a keynote speech titled "The Age of Engagement."

She said that when industries are on a fast growth trajectory, or those businesses going from a 25 percent reach in a marketplace to 50 percent, they're in position to earn big dollars. Morgan Stanley expects broadband, for example, to infiltrate 50 percent of all households by 2011, bringing digital advertising into that sweet spot, she said. Mobile phones will also be increasingly important, she emphasized.

"We've got 900 million global customers driving on the same highway," Meeker said. The only differences in people, she said, are in their access speed, language and access device.

Meeker discussed her experience in helping to take Google public last September. Referring to the company's mission statement to organize the world's information and make it universally accessible, she said: "When you think about it, there's rarely been an idea as big as that. And maybe they can just pull it off."