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Piper Jaffray Raises Online Ad Predictions

NEW YORK - When 2003 is done and gone, the online advertising industry will have seen a dramatic 14 percent growth rate, increasing to $6.7 billion in revenues, driven by strength in search. That's the word from U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, in a report released Thursday at the investment bank's Online Advertising Symposium here.

The report predicted online advertising revenues would exceed $15 billion by 2008, which would represent a compounded annual growth rate of 18 percent.

The numbers are quite similar to those put out in August by Jupiter Research, which has the same parent company as this publication. Jupiter predicted 2003 would close with the industry bringing in $6.3 billion. The Jupiter forecast calls for ad spending in 2008 to come in at $15.8 billion, and Jupiter also pegged search as the biggest driver of growth in the short term.

According to Piper Jaffray, search will grow at a 20 percent compounded annual rate, with its sister service, contextual advertising, rising at an 84 percent compounded annual rate to $1.4 billion by 2008. Brand-oriented advertising is expected to grow at the rate of 14 percent, according to Rashtchy's report.

The analyst expects online advertising revenue to grow faster than the overall advertising market -- partly because the Internet will be stealing market share from traditional media outlets. By 2008, Piper Jaffray expects online advertising to account for nearly 6 percent of total ad spending, compared to the current rate of approximately 2 percent.

"In the early years, however, it will be due mostly to gains driven by increased budgets that are allocated more to online," the report says, "as the effectiveness of the medium is proven and as the small online ad budgets are easier to increase."

The report compared online advertising's growth trajectory to that of cable in its first 11 years of existence. Although online experienced a boom and bust driven by the dot-com investment boom, it is now leveling out to follow a parallel path, the report said. The results suggest, according to the report, "that our estimates reflect a growth path already traveled by other types of new media."