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Analyst: Online Advertising Outlook Bright

Thanks to a number of favorable factors, the online advertising industry is poised for much stronger growth than expected for the year, according to an analyst with investment bank Goldman Sachs.

In a research note issued Tuesday, Goldman Sachs Internet analyst Anthony Noto doubled his forecast for the online advertising industry in 2003. Noto now expects revenue to increase 10 percent to $5.2 billion, up substantially from his earlier 5 percent growth forecast. Both figures exclude AOL's hard-hit advertising business. With AOL factored into the equation, Noto still anticipates 1 percent growth.

Yahoo! has led the way toward the sunnier future. Following two quarters of gangbusters results, with growth in both branded advertising and paid search, the company is poised for continued momentum, according to Noto.

For the year, Goldman Sachs expects Yahoo!'s core advertising will bring in $346 million, a 6 percent increase from 2002, as advertisers vie for prime Yahoo! real estate, such as its front page. Paid search, meanwhile, will account for $267 million, more than double last year's results.

While Yahoo! has long been a bright spot in the online ad industry, Noto sees a broader recovery taking hold. A chief reason: broadband adoption is making the Internet more readily available and more central to consumers' lives, with advertising dollars following.

"As a result of the growth in broadband, and a gradually improving economy, we look for a faster than expected online advertising recovery, both in terms of current online advertisers increasing ad budgets and new traditional advertisers becoming more willing to test and allocate dollars to alternative media channels," Noto wrote.

Traditional advertisers in key sectors, such as automotive, consumer packaged goods, and entertainment, have led the way.

Despite recent skepticism from Wall Street over its many acquisitions, new products, and competitive position versus Google, Noto sees improved prospects for Overture, as it begins to garner a higher price per click from its keyword advertisers. Goldman Sachs anticipates Overture receiving 40 cents per click for the rest of the year, with traffic acquisition costs -- the amount Overture pays its distribution partners -- coming in slightly lower at 64.5 percent.

As a result, Noto upped Overture's 2003 revenue forecast by $26 million and expects earnings before interest, taxes, depreciation and amortization to come in $10 million higher than previously forecast.

Goldman notes signs that AOL has finally turned the corner in righting its advertising business. The company has remained confident that it can start growing its ad business despite its sharp decline in subscribers. Noto expects AOL's ad business will be down 35 percent this year, as the long-term contracts continue to expire, but should perk up again in 2004