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IAB: Online Ad Spending Leveling Off

E-commerce and the Economy

After several years of meteoric growth, Internet ad spending is coming back down to earth.

That's according to new findings from the Interactive Advertising Bureau (IAB), the trade group representing the online advertising industry, which is pointing to the economic downturn as the culprit for the change.

The IAB partners with Pricewaterhouse Coopers to compile comprehensive ad-spending reports throughout the year based on member companies' data.

Traditionally, online advertising, much like e-commerce, has posted consistent, double-digit growth that reflected consumers' increasing reliance on the Web to research products and make purchases.

But the line graph in the IAB's latest report is flattening. Third-quarter digital ad revenues reached $5.9 billion, up 11 percent from the same period in 2007. However, third-quarter spending increased just 2 percent from the second quarter, a symptom of the broader woes hitting all sectors of the U.S. economy.

"The growth of interactive advertising that we've been experiencing over the past few years has stabilized due in large part to the difficult current economic climate," Randall Rothenberg, the IAB's president and CEO, said in a statement.

Yet Rothenberg also said that online advertising is better positioned to withstand the economic downturn than traditional marketing channels because it offers advertisers more accountability and insight into the effectiveness of the campaign.

Other analysts have suggested that the online ad industry is likely to continue benefiting from the secular shift of advertisers, who are allocating more of their budgets to online media. Still, many believe that some Internet ad formats are likely to fare better than others.

Specifically, search ads are generally seen to be more durable than display ads, because they're the more measurable of the two formats. Search ads are sold on a cost-per-click basis, so advertisers only pay when a consumer takes a specific action. Display ads, by contrast, are typically sold on a cost-per-thousand-impression (CPM) basis, so they are more commonly viewed as a tool to build brand awareness.

Signs of a slowdown began in the first quarter of the year, when the IAB reported the first quarter-to-quarter drop in ad spending since 2004. Spending dipped again slightly in the second quarter, before nudging up in the third period.

[cob:Special_Report]Taking a longer view, the 11 percent year-over-year gain posted in the third quarter, while itself an impressive growth rate, was well below the rates of previous years.

In 2007, the third-quarter spending mark of $5.27 billion represented a 21 percent increase from the same period in 2006. That quarter, in turn, saw spending jump 25 percent from the third quarter in 2005.