What Recession? Online Giants Rake in Ad Bucks

Google, Yahoo and Microsoft Report Surging Earnings Amid Widespread Gloom in Other Sectors

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NEW YORK (AdAge.com) -- That recession gripping the country and many of its biggest businesses is skirting around the internet. True, Google saw a slowdown in retail spending and Yahoo a softening in travel, finance and retail. Yet neither was enough to significantly dent the first-quarter earnings of these web giants, which both grew more than 30%. And while Microsoft's fiscal third quarter disappointed many, ad revenue was a bright spot, growing 29%.
Jennifer Moyer, chief operating officer of WashingtonPost.Newsweek Interactive
Jennifer Moyer, chief operating officer of WashingtonPost.Newsweek Interactive

Credit the fact that the internet is generally less expensive, more targeted and easier to track than most traditional media -- and at a time when marketers are pinching pennies, they want to be accountable for every one. According to Marketing Sherpa, 38% of marketers expect to increase their online ad spending during the economic downturn, a number only slightly higher than the 36% who expect to decrease their traditional media outlay.

But while it seems clear online players are better positioned than their offline counterparts to weather the recession, that doesn't mean they are completely -- or even equally -- insulated. "To say online is not being affected, that our growth wouldn't be higher if there wasn't a recession, that's an overly optimistic statement," said Jennifer Moyer, chief operating officer of WashingtonPost.Newsweek Interactive, suggesting that branded sites such as her own will not reap the same benefits as portals, ad networks and search engines.

"I don't know that branded publishers like ourselves will be the primary beneficiaries of that move. It will mostly likely be, in my opinion, portals and ad networks and the traditional vehicles to which direct-response advertisers allocate their dollars."

More per click
That appears to be the case so far. Talk to Google and it's the company's targeted, direct-response nature that will be key to surviving and even thriving in a downturn. Omid Kordestani, Google senior VP-global business development, told investors that despite slowdowns in the expected areas -- retail was a weakening category and one in which budgets have been postponed, he said -- other categories were strong enough to pick up the slack. And while U.S. paid clicks are slowing, prices for many of those clicks are rising, and international growth continues to fuel Google's search business.

"We haven't seen anything that significantly indicates to us that one vertical or another is that risky," Mr. Kordestani said. "We just are going deeper into these accounts, and in some cases when the budgets are delayed, it's made up by other online categories."

Diversification of ad dollars was Yahoo's savior as well, said Chief Financial Officer Blake Jorgensen. "Our diverse base of advertisers and industries has produced good overall growth and helps to offset cyclical weakness in different sectors," he said, adding that even when advertiser budgets fall, the impact on the internet ad industry will be blunted because of its superior targeting and accountability.

As recession looms, marketers are looking to cut waste and reach in-market consumers, a potential boon for targeted vertical sites that offer "bottom of the purchase funnel" opportunities. Take the automotive industry, where clearing inventory off the lot will take priority over the general branding campaigns. The industry's likelihood of getting in front of in-market buyers is much greater on Edmonds.com than it is in Vanity Fair or a general online news site.

Double-edged sword
But for some vertical sites, the very thing that elevates the web above the recession fray -- its targeting and accountability -- could work against them. The longtime destination for medical advice and pharmaceutical ads, WebMD, last week fired off a warning to investors that its 2008 outlook appeared weaker thanks to a "recent shift toward shorter-term buying commitments ... which the company believes is driven by increased caution in the current business climate."

The company didn't elaborate. But Mitch Lowe, CEO of JumpStart Automotive, suggests WebMD's troubles may be due to nonendemic advertisers shying away as marketers stick to targeted areas vs. broader demographic buys. And, indeed, it turns out about 40% of WebMD's ad revenue is from nonendemic categories, according to TNS Media Intelligence: 13% from media and advertising advertisers, 6% from a category it calls miscellaneous and services; 3% from food advertisers; 2% from political advertising and 1.5% from the auto category. (The other 60% of WebMD's advertising is endemic -- categories related to health, such as pharmaceutical, personal hygiene, diet and fitness and medical-supply advertising.)

Mr. Lowe, whose business exceeded first-quarter goals by 30%, said, "I don't think it matters whether you're diversified or generalist but I think it matters how well you can target the message."
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