Internet Advertising Will Weather a Sluggish Economy - eMarketer
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Internet Advertising Will Weather a Sluggish Economy

Growth in Internet ad spending will slow next year before rebounding in 2008.

By David Hallerman - Senior Analyst

December 6, 2006
The latest eMarketer estimates put total US Internet ad spending at $16.4 billion this year, a 30.8% gain over last year's $12.5 billion. The prime engine behind such strong growth is Google, whose US online advertising revenues are expected to be more than $4 billion (after subtracting traffic acquisition costs paid to network partners).

US Online Advertising Spending, 2004-2008 (billions)

Impressive results will continue in 2007, with total US online ad spending reaching $19.5 billion. However, at 18.9%, the growth rate will clearly be more modest. This will be due to overall economic weakness, with US real GDP growth expected to fall from over 3% in 2006 to around 2% in 2007. It is, however, noteworthy that even with a softening economy, growth in online ad spending will be 17.5 percentage points higher than growth in total US ad spending (set to inch up by only 1.4% next year).

With a similar take on the overall US landscape, Merrill Lynch media analyst Lauren Rich Fine said on Friday, December 1, (as reported by MediaPost) that the investment bank's tiny 2.6% overall ad spending increase for 2007 is "not surprising, given the more muted economic expectations next year."

In addition, as Steve Fredericks, the president and CEO of TNS Media Intelligence, told eMarketer in early December, "We see GDP remaining sluggish at least through the first half of 2007."

US real GDP growth is likely to be closer to 3% in 2008. Online ad spending will also rebound with a 22.1% increase over 2007, to reach a total of $23.8 billion. With political races increasingly dependent on Internet communications and with the 2008 election expected to be hotly contested, a significant chunk of what was a $3.14 billion political advertising market in 2006 (according to PQ Media) will go online. In addition, the 2008 Summer Olympics will also help support an Internet ad-spend uptick.

US Online Advertising Spending Growth, 2004-2008 (% increase vs. prior year)

Earlier, more conservative ad spending estimates, including those from eMarketer which put the 2006 total at $15.9 billion, were colored by Yahoo!'s relative weakness. This will see the company's ad revenues grow by only 17.5% this year, compared with a 37.3% increase in 2005.

Furthermore, while Yahoo!'s anticipated 2006 US ad revenues will account for 17.5% of the total US Internet ad market in 2006, that share is a nearly two-point drop from last year's 19.4% figure.

In September, eMarketer expected that Yahoo!'s revenue wobble would ripple across the entire market. Subsequent data have shown this effect to have been very limited. For example, the Interactive Advertising Bureau and PricewaterhouseCoopers third-quarter figure of nearly $4.2 billion in online ad spending represents a gain of nearly 33% over the third quarter of 2005. The implication is that Yahoo!'s losses have been gains for other sites; not only Google, but competing portals such as AOL, which posted 46.0% worldwide ad revenue growth in the third quarter and is expected to increase US online ad revenues by approximately 40% in 2006.

For more on Internet advertising, read eMarketer's US Online Ad Spending: Peak or Plateau? report.

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