How Will Online Advertising Fare – Part 1, The Numbers

Last week, our two part editorial on the economy looked at some of the first warning signs that only hindsight can provide, and then the current culmination of these events, from historic bankruptcies, unprecedented government interventions, and unexpected (almost) forced acquisitions. It was an article that we had wanted to write for months but kept waiting as each week brought some new and often historic twist in an already historic challenge to the American system. We left off last week with talk of a $700 billion bailout on behalf of the government and some perceived stability in our future. Almost to be expected, the sure-to-pass plan didn’t. Monday, investors anxiously watched as the bipartisan bailout plan, ended up not so bi-partisan after all, with its failure to pass resulting in the single largest point drop in the history of the Dow Jones Industrial Average of 777 points (only to seesaw again the following days). People that we know who worked at some of the surviving institutions, didn’t stay their usual late hours; they left after the market closed to ponder what they had witnessed. And, earlier that same day, news came out that another of the top banks would face being taken over were a buyer not found, so a deal had been struck for Bank of America to purchase Wachovia. This followed on the heels of news late last week that Chase purchased Washington Mutual. In both cases, just as happened with Fannie May and Freddie Mac, shareholders saw their stock values decrease upwards of 80% in a single day.

Unlike, this period of financial uncertainty and corporate foreclosures from the Internet bubble eight years ago, the companies going under today don’t have a direct role in the Internet economy, i.e., Lehman Brothers doesn’t exactly spend a lot of money online.  It’s not the same as a Pets.com going bust and their $100 million online budget disappearing. In other words, it’s not clear how the actions we see today will impact the online sectors ability to generate revenue in the proverbial tomorrow. It was easy to say that it might have a limited impact a few months ago when we saw the fire sale of one firm and the apparent survival of another. That was before the financial world eviscerated, giving itself some freakish colon cleanse. Trying to suss out the impact has its challenges, because depending on whom you read, the impact of the financial economy on the Internet economy will be either very little or severe. A classic example of the challenges comes from looking at student lending. The changes in the credit market – that it’s more expensive and less available – mean that students will have a harder time borrowing money to pay for school, and that will result in fewer students for private schools, ones like University of Phoenix. If Phoenix can sign people up as leads but not convert them as enrollees, they can’t make money, which means they won’t spend as much money. (We already saw this with mortgage where lead supply was high but demand low because lenders couldn’t lend.) But, when will that difficulty in student lending actually impact someone like Phoenix, if at all? That’s what no one really knows. With regard to the Internet economy, here’s what some are guessing, and as we will see, they not only vary but tend to vary based on which disaster had occurred at the time of their writing.

Those who have paid passing attention to reports on online spending have probably noticed some ongoing revisions to this year’s online ad spending projections, downward revisions naturally. For years, the financial services sector led the list of advertisers spending online, and while they still spend big, they have already cut back their budgets. By most accounts, they have spent 30% less this year than in year’s past, and it wouldn’t come as a shock to learn that the actual number exceeds that. Hardest hit, most predict, will be the social networks, experimental formats, and tier two sites. The crème of the crop might experience some decrease, but for the most part, like the Super Bowl, the major spenders will feel pressure to keep up their presence there but not so much on areas that they can’t as easily justify. Premium video and some mobile should continue to fair well, as they are still on their growth curves with overall budgets still a tiny fraction of the greater online ad pie. But, many of those firms run at less than break even, which puts them in a tough spot for sustaining their business. Social networks and tier two sites will suffer the most because they rely solely on ad revenue, and not just any ad revenue but primarily display. And of all the formats display space will struggle the most, despite recent research suggesting it plays a role in search behavior.

For some quantitative numbers, as reported in several outlets, such as this Business Week piece, eMarketer "expects Internet advertising growth to slow to 17.4% this year from 25.6% in 2007. Next year, growth will slow even more, to 14.5%." As MediaPost explains, eMarketer "trimmed its forecast for online spending twice from $27.5 billion to $24.9 billion. It has also lowered its estimate for social media to $1.4 billion and revised downward its estimate for online video from more than $1 billion to $505 million (partly as a result of applying a different methodology to the category)." The 14.5% adjusted growth rate for 2009 means total ad spending of $28.5 billion. Things will pick up again by 2011; AdWeek says "an anticipated boom in online video advertising, combined with a recovered economy, will mean spending growth greater than 20 percent for the first time since 2007. Marketers are expected to devote more than $40 billion to online advertising that year."

Where things get a little less clear is in trying to make sense of display advertising data available to date. The two major tracking firms, Neilsen and TNS Market Intelligence disagree on the exact impact the economy has had to date. TNI says "online display advertising rose about 8.6%, but the rate of growth ebbed a percentage point to 7.6% during the second quarter of 2008. TNS MI’s preliminary data for July shows online display ad spending rising only 5.5%." They summarize by adding "the online display market is mirroring a pattern of deceleration across the major media, as marketers and consumers begin to lose confidence in the overall economy." Neilsen also shows some gloom in their reporting; instead of growth of 8%, they reported that online display ad spending had eroded 6% during the first half of the year. The variance, according to rival TNS comes from Nielsen’s methodology which factors in only CPM-priced ads at the exclusion of performance-based inventory. The good news as we will see in Part 2, is that even with the economy acting quite differently from eight years ago, the online ad sector is acting similar, and the answer is once again, a lot better than the overall market. But unlike 2000, not all in the performance space will do well. This time around, won’t be a free for all.