New media
Behind the coming internet slowdown
By Diego Vasquez
Mar 1, 2007, 01:03

After five years of gangbusters growth, the online advertising boom will finally begin to slow this year. For the first time since 2002, U.S. web ad revenue will rise at a pace below 20 percent, according to a new report released this week by eMarketer, the internet research firm. The company predicts that ad growth in 2007 will be 18.9 percent, down nearly 12 percentage points from last year’s 30.8 percent. This will be the first time in three years that ad growth has not hit 30 percent or more. What’s more, excluding a slight uptick in 2008 due to presidential elections and Olympic advertising, the rate of web ad revenue growth will decline each year through 2011, though it will still remain healthy, above 12 percent. Of course any new media hits a ceiling on its growth eventually, and even the slower growth rate puts online well ahead of nearly every other part of the media economy. David Hallerman, senior analyst at eMarketer, talks to Media Life about the economy’s effect on online ad spending, why the web still has room to grow, and the impact of video ad spending.

You predict online advertising growth will finally slip below 20 percent this year after four straight years above. The leveling off was inevitable, but why is it coming now?
 
There are a few factors. Partially it is a [reflection] of the market in the U.S.--this is U.S. only, some growth rates internationally will be higher. But there is economic weakness.

Between the budget deficit and the trade deficit and softness in the U.S. dollar, you can expect some softness in the economy.

But it’s still at a very high growth rate compared to any other medium historically—no medium has ever gone four years in a row with 20 percent growth rate.
 

What will be the biggest issues defining online advertising growth the next five years?
 
The economic factors, and also a greater influx of traditional companies moving online. In 2005 the top 100 advertisers by dollars in the U.S. put less than 3 percent of their ad budgets online. And these are mainly branding advertisers.

With an uptick in online video, and to be able to have same ads online as on TV, it’s extremely appealing, so that will help define growth over the next five years.
 

You predict a slight uptick in 2008, but after that it will decline every year until 2011. Is that just a reflection of presidential/Olympic advertising, or is there anything more at play there?
 
There’s going to be a record amount of political spending in 2008--there’s going to be a lot of money going in, and online will get a fair share of that. That’s why there’s a bit of a bounce-back.

At the same time, as overall ad spending is flat to a 1 percent growth rate, the reason the internet will do better is because it’s more measurable and with a direct response. Paid search is still the most measurable form of advertising around, so that will help support online advertising when the overall market is flat.
 

Do you think that annual online growth will slip to single digits anytime soon?
 
We don’t have it through 2011, and the further out you get on any projection, the less accurate it is. It will, but, what happens in the future when TV is delivered over the internet? Is that TV advertising? Or internet? There are some questions.

 
While it may slow, the latest boom shows no signs of a massive slowdown as we saw after the dot.com bust a few years back. Why did we avoid that kind of disaster this time?
 
There were several factors. In 1999-2000, a lot of the online companies were, I won’t say speculative, but out on the edge. Most of the sites have been around for a while, and Google is the one that’s relatively new. Most of them are established web publishers, and they will be around.

But it’s more fundamental. In ’99-‘00, there were a bunch of people who weren’t online much, and at this point the internet is central in so many Americans’ lives that it’s not the same medium that it was. It was far more peripheral in people’s lives back then.
 

How much will a predicted slowdown in overall U.S. economy growth affect the internet?
 
It will affect it, but less because even if there is an economic slowdown and companies pull back, where they do advertise they will want ads that are provable in their effectiveness.

So paid search, and video ads, when you can track where visitors to a web site come from and you know the ad had something to do with it, that capability will mean that even as there are cutbacks in overall spending, there will still be shifts to the internet.
 

What sort of impact will online video advertising have on web ad spending? What types of advertisers are most likely to embrace it?
 
In terms of dollars, it’s still going to be relatively low. By 2010 it will be 9 percent of overall internet spending, 11.2 percent in 2011.
 
Those sort of advertisers are really more big ticket items like auto, where they can demonstrate more about the product. The smart ones will have online video and online commercials that take them further than what they’re showing on TV. They can shoot extra video just for online. Online consumer packaged goods want to reach consumers online, video works very well for them as well.

Some of the video we’re going to see isn’t even counted in this, because they aren’t media purchases, they’re found on the company’s web sites. More and more the video on their own sites will be used to tell more about products. One of the things that’s a frustration [in terms of forecasting] is how much are companies spending on their own web sites?