Behind the decline
in online advertising
Spending this year is expected to fall 2.9 percent
By Diego Vasquez
Oct 22, 2009
Many forecasters predicted that internet advertising would continue to grow throughout the worst recession in recent memory, but now they've revised their predictions to say online spending will fall this year for the first time since 2002. Still, its losses will be much lower than other media, and next year growth is expected to pick up again. That's according to a revised forecast issued earlier this week by research firm eMarketer, which predicts that online ad revenue will fall 2.9 percent this year, to $22.8 billion, before rising 5.9 percent next year, to $24.1 billion. Online is suffering from comparisons to a strong 2008, the best ever in terms of web ad spending, hitting $23.4 billion. Growth will be driven by search, still the largest category, but also video, which will see the biggest year-to-year increases over the next five years as deep-pocketed advertisers shift their money toward that format. David Hallerman, senior analyst at eMarketer, talks to Media Life about why he changed his forecast, why third and fourth quarter will see slower declines, and why classifieds are hurting offline and online.
How has your forecast changed from the most recent one?
Well the most recent one before was in April and at that point we didn’t have the second quarter results from any large portals and we’ve also since got the third quarter results from Google, as well as the first half of the year historical data from PricewaterhouseCoopers. So those are some factors why the overall ad spending number will be down compared to before.
In April it was up 4.5 percent for the U.S for this year, and now the projection is for it to be down 2.9 percent.
But when you consider that the first half of the year was down 5.3 percent, down 2.9 percent for the year represents the likelihood that the market has reached bottom and has started to slowly climb its way back, at least more so than other media.
What were the major factors that prompted you to adjust it downward?
Besides the ones I mentioned, it’s looking at what economic forecasters are saying, and it’s also looking, for example, at classified ads.
For many years those have been the third-biggest part of the online market. They aren’t sexy ads, but they are very dependent on employment ads and real estate, and those are two markets that aren’t coming back anytime quickly. So there are just different factors at play.
Many media economists have said that the recession bottomed out in second quarter. What are you seeing in third quarter in terms of online spending and how it compares to first half 2009 and Q3 2008?
Well, you know, third quarter last year was very good. But year over year, first quarter was down over last year by 5.2 percent, and quarter two was down by 5.4 percent. In that light, our projections are for third quarter to be down 0.8 percent and down 0.5 in the fourth quarter, both basically flat.
That’s the internet’s response to some shift in the economy. But we’re not going back to double-digit growth rates anytime soon.
Why will online start growing again next year when so many other categories will still be negative?
The problems with some media, most notably print and radio to an extent, were only exacerbated by the recession, but there were already problems--not only them as media businesses, but how marketers use them has been changing.
Looking at online, the old saying about the dollars following eyeballs, that’s only partially true online because there’s a lot of activity online, such as social networking, that’s very important but won’t be monetized very much in terms of advertising.
You say search and classifieds are especially affected by the economic outlook. Why, and when will those start to see improvement?
Well, with search we’re going to start to see an improvement right away--it’s very dependent on consumer behavior. Most search ads are commercial in nature and are pegged at consumers. People aren’t searching less but they’re doing fewer commercial-based searches, so that somewhat lesser shopping but a lot more bargain shopping will be why search will be up this year, but only by a little bit.
Over the next few years search will be up but not by a lot because it’s already such a mature market.
Classifieds, as we discussed before, are uniquely dependent on certain markets that aren’t about to bounce back anytime soon. Employment and real estate are two of the biggest factors. EBay is counted in classified dollars, and there is less of that kind of shopping in general going on.
How is the classified category and its spending affected by Craigslist and the newspaper industry's woes?
For the newspaper industry, the amount they’ve lost on classifieds has been absurd. It’s a number of factors coming together.
It’s the economy, for one. But there's also the free sites like Craigslist. Together they've put a real damper on newspaper classifieds, more so than on online classifieds, but they've put a damper on both in terms of dollars.
Why will so-called deep-pocketed companies use online video to ramp up their digital marketing spending?
Some of the consumer packaged goods companies are also some of the largest advertisers, but in 2008 some were still putting a small percentage of their ad budgets online: Anheuser-Busch 2.2 percent, Unilever 2.2 percent, Fortune Brands 1.5 percent, Procter & Gamble 1.4 percent. That's their share of measured media budget that went to online advertising.
What video offers them is an ad format of branding they’re familiar with. And also there’s more trusted and professional video content coming online.
Why will growth for banner ads remain so low compared to many other categories over the next five years?
Banner ads are kind of like a fill-in for other aspects of a campaign.
There’s a lot of pricing pressure on banner ads, meaning the cost per impression has been coming down. It’s partly due to ad networks, and partly due to so many more web sites.
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