Net ad sector moderates

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The riotous web ad spending of a year ago is officially over. Once enjoying exponential growth rates, the online advertising industry is adjusting to more moderate growth. You know things are bad when bellwether Yahoo!'s stock price hits a low (recently dipping to under $30 from a 52-week high of about $250), and almost every major i-shop is slashing staff.

The Internet Advertising Bureau recently released its third-quarter Internet Ad Revenue Report, showing the first-ever drop in spending since the group began the report in 1996. In the third quarter of 2000, revenue grew to $1.97 billion, a 6.5% drop from the previous quarter. Ad spending is still up overall from a year ago-the IAB projects it'll hit $6.1 billion in 2000, up from 1999's $4.6 billion-but its pace has slowed.

Peter Petrusky, director of new media at PricewaterhouseCoopers, which compiles the quarterly Internet ad spending report on behalf of the IAB, said the industry's past yearly growth rates of 150% just can't be sustained long term. "It's just the law of large numbers," he said.


The magic number now stressed in analyst calls is the percentage of revenue an i-shop, ad network or site derives from traditional advertisers or Fortune 100 companies. DoubleClick, which laid off about 150 employees or 8% of its work force in December, said revenue from traditional advertisers in the third quarter was up 137% from the same quarter a year ago. At the same time, it was smarting from dot-com losses. It planned to write off $19 million owed by Internet advertising client, which might not be able to pay its ad-serving bill. The drop in Web spending could also cause more division among sites, enabling the Top 10 properties to further pull away from the pack, winning a great share of revenue. (See story at right.)


While things are tougher, said Christopher Todd, analyst at Jupiter Research, "the bottom line is that online advertising is not dying. What you saw last year was an anomaly."

Last year, he said, was more like an inverted fishhook, and right now "we're at the downward" point of the hook and it's probably going to continue through the second quarter. Jupiter projects $5.3 billion in total U.S. online advertising spending in 2000, a number that includes online classifieds. It expects that number to grow to $7.3 billion in 2001.

Jupiter and other researchers believe traditional advertisers are going to come to the rescue of online advertising. Mr. Todd points to Coca-Cola Co., which recently announced its would be allocating more of its marketing budget to the Internet.

The industry also has demographics in its favor. According to Jupiter, 122 million users were online in the U.S. in 2000, or about 44% of the population. It projects that number to grow to 138 million users, or roughly 50% of the U.S. population in 2001.

So how does a site go about surviving in 2001?

"It means they definitely have to get creative and innovative on how they attract their audience," Mr. Todd said. Publishers and ad sellers, "don't need to sell all their inventory to be profitable." He said they're better off selling less inventory at a premium.

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