Online Advertising Spending Set to Contract

As Search Growth Slows and Display Demand Drops, IDC Paints Grim Q1 Picture

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NEW YORK (AdAge.com) -- The internet advertising industry can soon expect to see its first contraction in ad spending since the 2001 bubble burst, according to a forthcoming report from global market data firm IDC.

The report also suggests fourth-quarter U.S. internet advertising sales, despite marginal increases in worldwide spending, have been far worse than estimated, increasing by just 0.4% to $7.13 billion from $7.10 billion in the same quarter last year.

According to IDC, search ads still grew 10% year-over-year in fourth quarter, buoying the sector at large, but display ads and classified ads fared worse, dropping 7% and 18%, respectively. IDC attributes the latter drop to stagnating movement of houses, jobs and cars, and because of the continued shallow numbers coming out of eBay, the major company in this segment.

Dim first quarter
Citing brand marketers' budget cuts, IDC's director for digital media and entertainment, Karsten Weide, suggests a dim forecast for U.S. online ad spending in the first quarter, perhaps stretching into the second.

"Even in the last quarter, search growth was only barely able to offset losses in display and classifieds," he said in a statement. "In the current quarter, while search ad revenue growth will not collapse, it will slow. Display and classified ads will most likely show worse negative change rates in first quarter 2009 than in fourth quarter 2008. All in all, we believe U.S. internet advertising revenue could contract by as much as 5% in first quarter. And things may get worse in the second quarter."

Mr. Wiede projects a turnaround for the digital sector by the middle of the year, with slow but noticeable recovery from there. His timeframe preempts most economists' estimations of an end of year-early 2010 recovery.

"I don't necessarily see a U-shaped model, where things get better as fast as they went down," he explained, "but economic pressure on marketers will accelerate their movement [to online advertising]. They're looking to up the return on investment they get for their dollar."

Online video growing
Even in the decline, Mr. Weide estimates online advertising will do better than the economy at large, pointing out that video is currently enjoying the high ground, especially as use increases.

"People are accessing video services not just on their PCs, but increasingly in the living room," he said. "That is really where it's at."

To that end, Mr. Weide presages some added pain for broadcasters, on par with what newspapers are wrestling with. In the interim, he says publishers must tie down their costs and expect to see whatever products aren't making money "walked off the plank."

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