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Jupiter: Demise of online ad spending greatly exaggerated

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Online ad spending is poised for a marked rebound and will reach $15 billion by 2006, up from $5.7 billion this year, according to a new report from Jupiter Media Metrix Inc.

Jupiter predicts online ad spending will account for 7% of the total advertising market by 2006, up from 3% this year. Spending by U.S. companies on other digital marketing initiatives—including e-mail, direct marketing and promotions—will grow even faster, according to Jupiter. Spending on e-mail marketing, coupons and promotions is expected to reach $19.3 billion by 2006, up from $2 billion this year.

Jupiter’s bullish forecasts contrast with dour predictions from Myers Reports Inc., a New York-based media market research company. Myers predicted that online ad revenues would only reach $4.73 billion this year, and that annual growth from 2002 to 2006 would be between 12% and 20%.

Jupiter attributes its upbeat forecast to an expanding, if tempered, acceptance of the Web by businesses.

"It’s truly being mainstreamed, though not on the grandiose scale that many people thought it would," said Rudy Grahn, a Jupiter analyst. "The Internet will eventually beat the telephone with adoption by business."

Pay-per-performance online advertising models will experience only slow growth over the next five years, according to Jupiter. They will account for just 22% of online ad spending this year and that share will only increase to 30% by 2006, Jupiter predicts. These findings run counter to conventional wisdom, which holds that marketers will increasingly seek to tie their online spending to how much business their ads bring in.

The pay-for-performance model is flawed because accurate measurement is elusive, Grahn said.

Advertisers hungry for return on investment are squeezing publishers for pay-for-performance models, and the publishers are the worse for it, Grahn said.

Advertisers, meanwhile, are frustrated by a lack of concrete evidence delivered by the models.

The result of this tension likely will be a payment system that encourages growth by combining cost-per-thousand rates with qualitative factors such as brand awareness, Grahn said. "We think hybridization is the strongest candidate, but people are going to be forced into it and backed into it," he said.

Jupiter’s even more optimistic prediction concerning online direct marketing rings true because the approach can be combined easily with sales initiatives—something clients are asking for, said Bill Babcock, chairman of direct marketing agency Babcock & Jenkins. "You can’t save your way out of an economic downturn, and you can’t brand your way out of it, but you sure can sell your way out of it," he said.

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