How deep is the online-ad well?

Everyone from Microsoft to the tiniest Silicon Alley start-up is counting on online-ad sales. Experts say they've got a huge market still to tap.

Elinor Mills Former Staff Writer
Elinor Mills covers Internet security and privacy. She joined CNET News in 2005 after working as a foreign correspondent for Reuters in Portugal and writing for The Industry Standard, the IDG News Service and the Associated Press.
Elinor Mills
4 min read
The memory still makes some in the financial community cringe.

During the dot-com boom, more than a few Internet start-ups planned to support free Internet services--and theoretically turn a profit--by selling online advertisements.

Needless to say, for many it didn't work. Now a new group of companies, ranging from tech giants to the tiniest of Silicon Alley start-ups, are banking on ad sales to support new Net services. Microsoft, for one, is pushing full-on into advertising with its Windows Live platform, which will offer Internet-based services like e-mail, blogging and instant messaging that are supported by ads and some subscriptions.

Sounds like the bad old days? Not at all, say industry experts. With new ad-tracking technologies and proven ad buyers like Procter & Gamble and Ford Motor leading the way, analysts believe there's a maturity and reliability to this ad boom that was sorely missing during the Internet bubble.

During the previous boom, "traditional advertisers hadn't yet embraced the medium, so growth slowed," said Denise Garcia, an analyst at WR Hambrecht + Co. "That's not going to happen again because Procter & Gamble, large auto manufacturers and other companies have said they are decreasing spending on traditional media, like television, in favor of online media."

Ford Motor, for example, dropped its magazine ad allotment from 23.5 percent to 21 percent last year but increased its spending on the Internet to 3.5 percent from 3 percent, according to AdAge.com. The company's overall ad budget remains flat, the article said. Ford, General Motors and Absolut Vodka all reportedly plan to spend 20 percent of their marketing budgets online this year.

It's clear that ad-driven Net giants like Google and Yahoo are onto something. In 2006, Google is expected to get nearly one-quarter of the $15.6 billion that market research firm eMarketer estimates will be spent on online advertising in the U.S., compared with the 20.7 percent Yahoo is expected to get, said David Hallerman, a senior analyst at eMarketer.

No surprise then that Microsoft 18 months ago starting using its own search engine and last week took the wraps off its ad business, AdCenter.

By most accounts, the online-ad market barely has been tapped. Online ad spending, which represents only 5 percent of total media spending, is projected to grow 24.4 percent this year, while all media, including television, radio, billboards, newspapers and direct mail, is projected to grow only 4.2 percent, according to eMarketer.

"People are spending less time with newspapers, print magazines and radio and more time online," Hallerman said. "Now many more people have the Internet as a part of their daily lives."

Online ad spending in the U.S. rose to a record $12.5 billion in 2005, according to a study released last month by advertising trade group Interactive Advertising Bureau and independent auditor PricewaterhouseCoopers.

By 2010, online ad spending in the U.S. is expected to rise to $23.5 billion, according to market research and consulting firm Parks Associates. Worldwide, online ad spending is forecast to grow from $19.5 billion in 2005 to more than $55 billion in 2010, according to Piper Jaffray.

Search is by far the most lucrative area, accounting for 40 percent of the total online ad spending in the U.S., according to JupiterResearch. Search advertising is expected to grow from $4.2 billion in 2005 to $7.5 billion in 2010, while display advertising is forecast to grow 10 percent between 2005 and 2010 to $7.5 billion, JupiterResearch has forecast.

This time around, the technology is better, too. Online-advertising technology has advanced to the point where marketers can see how and if their ads are resulting in sales and even target ads based on location, demographics and other factors, something ads in traditional media can't do as easily.

During the previous online-ad spending wave "people were charging high CPMs (cost per thousand impressions on banner ads), and there was not a way to tie the effects of the (ad) campaign back to any metrics. There was not enough accountability," Riley said.

But there are caveats. Though the amount being spent on Internet advertising is growing, the rate of that growth in the United States is slowing slightly, from 32.5 percent in 2004 to 30 percent last year, said Hallerman. Growth in online-ad spending domestically is expected to be 19 percent in 2007 and 17.7 percent in 2008, he said, adding that: "The growth is trending downward. We're no longer seeing hyper growth rates."

It's also not a given that companies won't again cut their online-ad budgets, experts said.

"There could be a real downturn in the U.S., if not the world, economy. Deficit spending is huge in this country," said Hallerman. However, "online might still get a decent share, even in a downturn, because of its relatively affordable advertising compared with television, and the fact that you can track how effective advertising is."

Advertising tends to be one of the first expenses to be cut when companies are tightening their belts. "If there is a slowdown in the economy, advertising is always the first thing to decrease," said Garcia of WR Hambrecht. "It is not considered a necessity."

That said, online video advertising has barely been tapped, and that could lure ad dollars away from television, said Garcia. And as big Net companies try to localize their content, small businesses, restaurants and other local ad buyers could increasingly move away from local newspapers, TV and radio.

"What happened in 2000 was that people lost faith in the model," said Gary Stein, strategy director at Ammo Marketing. "I think there is confidence in the overall medium at this point."

CNET News.com's Ina Fried contributed to this report.