I've blogged before that in MHO, internet advertising is over-rated and will increasingly prove so to be.....
Financial turmoil catches up with online advertising
By Eric Pfanner
Sunday, October 26, 2008
PARIS: Are you clicking "close" more often, to work your way past advertisements that get in the way of your Web browsing?
If you are, it is because Web sites are trying harder to attract advertisers, one symptom of a slowdown in the previously runaway growth of online ad spending.
"Publishers are being much more flexible, because they're trying to attract the money," said Nigel Morris, chief executive of Isobar, a digital advertising agency owned by Aegis Group, based in London.
Until recently, attracting money to Internet advertising was hardly a challenge. With spending racing ahead at 30 percent-plus rates, everyone - from Web 2.0 start-ups to the media giants of the offline world - was trying to get a bigger piece of the action. Some analysts said online advertising might even prove immune to the effects of the global credit crunch, as money flowed onto the Internet and out of newspapers, television and radio.
Now it is increasingly clear that Internet advertising is also getting hit hard by the economic downturn. Spending is still rising, but growth has slowed sharply, to low double-digit percentages in major markets like the United States and Britain. And some kinds of Internet advertising are faring considerably worse.
"What's happening in the economy is clearly pulling growth down much more quickly than people expected even a few months ago," said Ian Maude, an analyst at Enders Analysis in London. "It's certainly a grim outlook compared with what we've gotten used to over the last few years."
The reversal has been particularly striking in Britain, the world's most advanced market for online advertising. About 20 percent of British ad spending goes to the Internet, the highest percentage of any large country and more than double the worldwide average. Online ad revenue in Britain is nearly as high as in Germany, France and Italy combined.
Enders Analysis still expects online ad spending to rise by 18.5 percent this year in Britain. But that is less than half the growth rate of 2007. And most of the gain is going into one advertising category - contextual ads that are sold by Google and other search engines and shown alongside responses to users' queries. In the first half of the year, 58 percent of Internet ad spending in Britain went into search, according to PricewaterhouseCoopers. Google mopped up 87 percent of that amount, according to Efficient Frontier, a specialist in search campaigns.
Search ads, which often link users directly to e-commerce sites, offer budget conscious advertisers the prospect of instant gratification. Online ads whose payoff is less immediate - screen-covering "interstitials," for example - are doing worse. Spending on online display advertising in Britain fell to $497 million in the first six months of this year, from $575 million a year earlier, according to the research company Nielsen.
While weakness in display advertising has been most pronounced in Britain, analysts say other markets, including the United States, are showing softness. And new online formats, like video advertising, are also growing more slowly than analysts had expected.
Eva Berg-Winters, an Internet analyst at PricewaterhouseCoopers, said the financial crisis had made advertisers more cautious. A year ago, they might have been willing to experiment; now they are more likely to stick with the tried-and-true, like television.
The thinking, she said, goes like this: "Nobody is going to fire me if I do that, whereas if I spend money on online video advertising and all I get is a few page impressions, that could be risky."
Old media are still losing market share to the Internet, but not as quickly as some analysts had predicted they would during the economic downturn. Rob Norman, chief executive of Group M Interaction, a digital advertising unit of WPP Group, said one reason was that some marketing managers prefer television or print because of a need to reach the largest possible audience with the minimum amount of spending.
For start-up companies seeking to develop the Internet as a mainstream, ad-funded medium like television, that is bad news, at least until the economy improves. Their founders have dreamed up myriad business models based on tapping online display advertising to make money from blogging, social networking, music and video sharing and other Web 2.0 services.
Amid the economic downturn, "there's definitely going to be a flight to quality - known Web sites, companies that we know are strong and will be around next week," said Debra Aho Williamson, an analyst at eMarketer, a research firm.
As Web powerhouses like Google consolidate their strength, analysts say, there are already signs that the "long tail" of niche sites is getting squeezed. Growth is slowing for some Internet advertising networks, which group together space available on such sites into a single ad buy so that marketers do not have to deal with each individual site. One network, Adbrite, said this month that it was laying off 40 of its 100 employees.
The networks have made vast amounts of space available to advertisers. That has contributed to a general drop in the price of online display ads, said Morris, of Isobar. For advertisers, who often buy ads based on the number of "click-throughs" they deliver, that can be a good thing. But for niche sites, that may mean tough times.
"If you're doing a 'long tail' buy, there's enormous downward pressure on price there," Morris said.
The popularity of social networking has also created a vast new pool of available advertising space, much of which has been hard to fill.
Simon Levene, a partner in London at Accel Partners, a venture capital firm in Silicon Valley with investments in Facebook and dozens of smaller Internet businesses, said as many as a third of venture-backed Internet startups worldwide could fail over the next two years.
Levene said he remained optimistic about the prospects for Web 2.0 companies and other digital startups. Accel recently invested in AdMob, a specialist in mobile advertising, for instance.
But in order to survive, some Web companies may have to look beyond advertising, Levene said. He added that he was urging some companies in the Accel portfolio to consider charging users subscription fees for premium services, for example.
LinkedIn, a fast-growing social network for business users, has benefited from such a model, generating a majority of its revenue from nonadvertising sources.
The company has also maintained its appeal to venture investors. Last Wednesday, it said it had raised $22.7 million in new financing from Goldman Sachs, McGraw-Hill, SAP and Bessemer Venture Partners.
With other sources of revenue, Levene said, "at least you're not worried about whether an agency will call up and say, 'We're going to put an ad on your site."'
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