Advertisers are striking harder bargains with sellers, driving down already low or negative operating margins among Web media companies. The little ad spending taking place is concentrated on a few highly trafficked Web sites, likely forcing smaller companies out of business, analysts say.
In addition, traditional advertisers, expected to fill the gap left by defunct dot-coms, are cinching their purse strings because of a broad economic slump, slowing a potential turnaround.
The "big double-digit percentage increases of the recent past won't show up this year--that's for sure," said Robert J. Coen, director of forecasting for advertising agency Universal McCann. "It's going to be a tough year for Internet advertising."
It's not news that online advertising is in trouble. The industry has undergone tidal shifts in the last year, following last April's stock market downturn. As dot-coms sank, their extravagant ad budgets went with them, and surviving Internet businesses are struggling to fill the gulf.
Flagging online ad sales pasted countless dot-coms, including Walt Disney's Go Network, APBnews.com and NBCi. Internet stalwarts such as Yahoo have cut staff and recast revenue plans to downplay dependence on ad sales.
Although analysts said dot-com companies will eventually see an advertising comeback, most agreed that relief will come slowly.
"The prediction in the industry right now is that mainstream marketers will put 2 (percent) and 3 percent of overall marketing dollars on the Web this year," said Adam Gerber, media director for the DigitalEdge, the interactive and planning arm of the MediaEdge. "We're still 6 to 12 months away from where medium will start to rebound."
Signs of life
Speculation about the short-term health of the online ad market comes this week after an industry report showed U.S. Internet ad sales hit $2.2 billion in the last three months of 2000, up 9 percent from the previous quarter. For the year, ad sales grew by 78 percent from 1999 to $8.2 billion for 2000, according to the study released Monday by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers.
Previously, the industry was dealt a harsh blow in the third quarter when online ad spending detoured after more than four years of continuous growth. Ad sales dipped 6.5 percent from the second to third quarters, reaching $1.9 billion.
Despite an uptick in the fourth quarter, the figures reflect slowing percentage growth in the online ad market after years of unprecedented development. Year over year, revenues have typically jumped by triple or double digits; for example, from 1998 to 1999, annual sales ballooned by 141 percent. Quarterly revenues now are steadying around $2 billion a quarter, or $8 billion annually.
Some analysts have even lower expectations for Net ad sales. Merrill Lynch analyst Henry Blodget predicted in a recent research report that the online ad market will decline by 25 percent in 2001, reaching only about $6 billion in annual sales. This will force almost all Web media companies to record year-over-year declines, he said.
Even if the market steadies, however, analysts said Internet media companies won't see the same robust growth that characterized the early years.
"We are not expecting advertisers in general to let loose like they did in 1999 and 2000 in the online space. A more rational kind of thinking is taking place among advertisers," said DigitalEdge's Gerber, adding that advertisers are starting to demand quantitative evidence that online advertising fits their marketing objectives.
"There needs to be more data," he said.
Market leaders hit?
The outlook is bad news for battered dot-coms, although the message among the largest players has been mixed.
AOL Time Warner's America Online and Yahoo represent more than 50 percent of the total online advertising market, according to Blodget's research. And Universal McCann's Coen said that if Yahoo's ad sales are any indication, a softening in the market will likely ripple through other portals.
The Web portal, which is largely dependent on advertising revenues, recently reported first-quarter earnings slightly better than estimates. But it also delivered some bad news on the advertising front. The site's total number of advertisers fell to 3,185 from some 3,700 in the previous quarter; the average amount that each advertiser spent also dropped. Highlighting the positive, the company had said it expects to have 70 percent to 80 percent of its total ad revenue come from traditional advertisers by the end of 2001.
In comparison, AOL Time Warner's first-quarter earnings earlier this month beat Wall Street estimates. At the time, the company expressed confidence that advertising will continue to improve during the second half of the year, attributing its growth to ad deals that span its many divisions.
Industry experts say AOL Time Warner is avoiding some of the weakening in the ad market because it has diverse offerings. It can sell advertisers on deals across a range of media, including television, magazine and online. Blodget said that AOL Time Warner would likely increase its market share in 2001 from roughly 38 percent to between 45 percent and 50 percent. The predicted gain will come from deals with major offline advertisers such as General Mills and General Motors.
Yahoo, on the other hand, is expected to lose some market dominance because of a decline in long-term ad contracts, according to Blodget. However, the company recently signed traditional advertisers on its site, including Kia Motors America, Restoration Hardware and Miller Brewing.
MediaEdge's Garber pointed to a recent online branding campaign by Budweiser that uses just the company's name as one example of how traditional advertisers are beginning to tap the Web as one part of a mix of marketing tools.
"That's an advertiser that has realized that the online medium can build frequency (of impressions) that can be used to reinforce a brand and plays off larger marketing mix of TV...and other things they are doing," he said.
One bright spot has been in international markets, which have so far shown signs of a cushion from the United States' ad struggles.
On Friday, Yahoo Japan reported record profits over the last year, based on booming ad sales. Revenue from online advertising at Japan's top portal was up 158 percent over the previous year. Yahoo Japan, majority owned by Softbank, has enjoyed a surge in ad sales largely because of its traditional advertisers and strong demand for online advertising in Japan.
Net advertising is going gangbusters in the United Kingdom as well. Recently released figures from the IAB showed that online ad spending grew more than 200 percent year over year in 2000. Dollars spent totaled $222.1 million (154.7 million pounds) in 2000, up from $73.2 million in 1999, overtaking cinema advertising for the first time.
Looking for solutions
In an effort to lure more advertisers, Web media companies have been testing new ad formats that give marketers more real estate and opportunity for customer interaction. The IAB issued new standards for the first time in five years for many of these larger, interactive units.
The ad banner, the Web's standard format, lost ground in the fourth quarter among advertisers, according to this week's report. Sales of banners accounted for 40 percent for the quarter, down from 46 percent in the third quarter and from 47 percent for the year, the report found. Sponsorships followed in popularity, taking up 31 percent of sales for the quarter and 28 percent for the year. Classifieds, referrals and interstitials (or ads that pop-up on a visitor's screen) captured 20 percent of sales collectively for the quarter and 15 percent for the year.
Of all types of advertisers, consumer-related marketers spent the most money online in 2000, followed by computing, financial services, business services and media sectors, the report found. It represents data from all the companies that sell substantial online advertising.
Jim Nail, senior analyst for Forrester Research, said that in 2001, Net advertising is a buyer's market. Media buyers are dictating terms on rock-bottom rates and pay-for-performance deals, he said, adding that anecdotally, U.S. ad rates (called CPM rates, for the cost per thousand impressions) have dropped to about $1.50 from earlier highs in the double digits.
"The good news and bad news is that these times will drive a lot of media companies out of business or drive consolidation, which will reduce inventory and firm up prices for those that survive," Nail said.
Although the IAB typically does not forecast upcoming sales, IAB Chairman Rich LeFurgy said that the market will likely rebound some this year.
"We're looking at a good year coming up. We're hearing anecdotally that demand is picking up and the new ad formats are being accepted," he said. "Consolidation and new ad products are going to stabilize the rates or actually increase them."
While reflective of a more somber marketplace, LeFurgy said that the numbers still command attention, representing about 75 percent to 80 percent of cable ad revenues.
"In the next few years, the Internet will continue to generate solid revenue growth, and with the emergence of revenue from the wireless and (interactive) TV advertising industries, interactive advertising will set the pace going forward," he said.