Studies point to growing market for Net advertising

Online advertising is still booming, according to two new studies, regardless of the cloud of skepticism hanging over businesses that rely on it.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
4 min read
Online advertising is still booming, according to two new studies, regardless of the cloud of skepticism hanging over businesses that rely on it.

The reports offer a contrast to predictions by several Internet stock analysts, who have recently warned of slackening ad revenue growth for Web companies in the third quarter as a result of tighter marketing budgets from cash-strapped dot-coms. The studies, which show that online ad spending has maintained its robust pace, predict a strong growth curve in the coming years, primarily fueled by greater online spending from traditional marketing powerhouses.

In recent months, Internet companies that depend on ad revenues have been under the gun. From start-ups to giants such as Yahoo, Net media companies have drawn skepticism over whether they can maintain their stellar revenue growth. And with this year's market downturn, ad spending by online start-ups, in particular, has waned.

Offline companies such as Coca-Cola and Procter & Gamble, however, had taken a wait-and-see attitude toward online ad spending. Now they are beginning to expand their Net marketing budgets, a trend that is expected to continue over the next few years.

Coca-Cola spokeswoman Kari Bjorhus confirmed the company is growing more interested in advertising online.

"A greater portion of our marketing dollars are going to our Internet activities," she said. "It's still not huge, but it's increasing."

A report released yesterday by the Internet Advertising Bureau (IAB) shows that online ad spending over the first quarter of 2000 reached $1.95 billion. The study found a 9.9 percent gain in the first quarter from the fourth quarter of 1999 and a 182 percent jump from the same period a year ago.

Conducted independently by PricewaterhouseCoopers, the report noted that the recent wave of dot-com failures has not tempered online advertising as a whole. Instead, more offline companies are incorporating online ad spending into their budgets and are working closely with Web sites to get their messages across.

"While the market correction and subsequent dot-com closures likely had some impact in slowing growth in the second quarter, the continued and growing numbers of large traditional advertisers expanding their budgets for Internet campaigns are really the news here," Rich LeFurgy, chairman of the IAB and general partner of WaldenVC, said in a statement.

Although the recent floundering of dot-coms has affected the larger Net companies dependent on ad revenues, some analysts said they may benefit from offline companies that are boosting their online ad budgets.

"It's a sign of the maturation of the industry," said Andrea Williams Rice, an equity analyst at Deutsche Banc Alex Brown. She added that the transition from dot-com ad dollars to offline dollars was expected--but not this quickly.

"It's a painful transition because it happened faster than most companies anticipated," she said. "But some of the bigger (Net) companies are well-positioned, and potentially they could benefit from transition as (offline) companies focus their spending on a handful of sites."

Last month, Rice cut Yahoo's rating to "buy" from "strong buy" in advance of the company's earnings report, citing an ad spending slowdown. Her warnings followed a similar caution from Merrill Lynch's Henry Blodget, who predicted lower-than-expected revenue growth because of the sour market.

Despite the warnings, Yahoo reported earnings of 12 cents a share, beating consensus earnings estimates of 10 cents a share. America Online also reported better-than-expected earnings on strong advertising and e-commerce growth.

Other trends in online advertising have shifted in recent months. Online ad buyers are beginning to demand concrete results as conditions of their ad deals. Web sites have begun to work with companies to accommodate these shifts and, as a result, are developing creative ways to help ad buyers convey their messages to their desired audiences.

The IAB report showed that different types of ad deals are being struck. Hybrid deals that mix ads with e-commerce accounted for 48 percent of all deals, followed by a 42 percent share for impression-based deals, which are related to the number of clicks an ad receives. Performance-based deals account for the remaining 10 percent.

The most common type of Net advertising continues to be banner ads, which accounted for 52 percent of all online ads. Following banners were sponsorships at 27 percent; "interstitials," or pop-up ads, at 3 percent; and email at 3 percent, according to the report.

Separately, a study conducted by investment banking firm Veronis Suhler showed that overall advertising growth has been fueled by the Internet. The report found that online advertising surged 140 percent from 1998 figures to hit $4.6 billion in 1999. Adding more confidence to the sector, the study concluded that online advertising will reach $24.4 billion by 2004, accounting for roughly 10 percent of all ad spending.

Authors of this study also attributed their revenue forecasts to the greater role of offline companies, especially traditional media companies.

"By developing content-rich Web sites and information portals, traditional publishers and television networks are positioning themselves to capture their share of revenue diverted to the Web over the next several years," James Rutherfurd, executive vice president of Veronis Suhler, said in a statement.