Thursday, October 9, 2008

Is Online Safe from the Meltdown?

OCTOBER 9, 2008

The economy and online ad spending

Online ad spending data from the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) for the first half of 2008 is in.

The numbers seem generally strong, showing double-digit growth compared with the first half of 2007 in several categories: search, display—which includes banners, rich media and video—and e-mail ad spending. And the total US online ad growth rate of 15.2% is nearly the same as eMarketer’s 17.4% projection for all of 2008.

Yet online classified ad spending was down by more than 5% and may turn out to be a canary in the coal mine, showing the first signs of dizziness in an increasingly toxic environment.

“The negative growth for classifieds closely reflects economic weakness,” said David Hallerman, senior analyst at eMarketer. “Whether used on eBay to sell products, on job sites by employers, or for real-estate sales, classified ad buys tend to be short-term purchases with short-term objectives.

“In contrast, most display-related ads, such as banners or video, are contracted ahead of time. For that reason, they are less of a mirror of the current state of online advertising than classifieds,” Mr. Hallerman continued.

The problem is not that banks spend so much on ads themselves. In a recent MediaPost article, ZenithOptimedia said, “The bank failures will have a fairly small direct effect on ad expenditure, since financial advertising contributes only about 4% of global ad expenditure, but fears for the future will cause consumers to cut their spending, while companies carefully inspect their budgets to find cost savings.”

Jack Myers also noted that the ad industry was undergoing a major transformation even before the crisis hit.

“The danger of ascribing downward spiraling economics of ad spending to the economy alone is that it camouflages several more endemic causes for ad spending declines,” Mr. Meyers wrote earlier this week. “The media marketplace is transitioning from one in which demand has exceeded supply (even as supply has grown exponentially) a marketplace in which the availability of supply is outpacing demand.”

The IAB does not forecast the future, but many companies that do have recast their numbers in recent months.

As detailed in a recent roundup:

  • Barclays changed its US online ad forecast for 2008 through 2012 to $24.79 billion (+16.9%), below its previous forecast of $26.17 billion (+23.4%), in May. They expect online advertising to rise at a 14.3% three-year compound annual growth rate (CAGR), resulting in the Web accounting for 13% of total US ad dollars by 2011.
  • J.P. Morgan lowered its 2008 US display market estimate to $8.2 billion from $8.6 billion. MediaPost said that represented 14% year-over-year growth, compared with its previous estimate of 20% growth. J.P. Morgan now expects online display to reach $9.4 billion in 2009, down from its previous estimate of $10.0 billion (16% growth compared with a previous estimate of 17%).
  • Cowen said in July 2008 that 2008 US online ad market growth would be 16% year-over-year, a drop from its previous estimate of 19%.
  • MAGNA also reduced its 2008 online ad spending estimates in July 2008 to 12% growth, down from the 16.5% it predicted in December 2007.

eMarketer estimated in August 2008 that online ad spending would reach $24.9 billion this year, down slightly from its March forecast. That still represents 17.4% growth over 2007.

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