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Online Ads: Slowing, But Still Growing

While Internet advertising's growth has slowed to about half its previous pace -- with revenue growing 10.6 percent from 2007 to 2008 -- it's still showing greater strength than the rest of the ad industry.

In the 2008 "Internet Advertising Revenue Report," the sector's industry association, the Interactive Advertising Bureau (IAB), and PricewaterhouseCoopers said that Internet advertising remains on track for continued growth, with overall revenue up by $2.2 billion to $23.4 billion year-over-year.

Meanwhile, signs point to continued declines in traditional ad spending. The Nielsen Company, for example, reported that U.S. advertising for 2008 had dropped 2.6 percent compared to 2007.

Still, the online sector is far from immune to economic weakness. During the past year, revenue growth slowed the most from Q3 to Q4, when the report indicated that the industry reverted from double-digit growth to the single digits for the first time since 2000.

The news puts a figure on the woes plaguing the online ad and e-commerce sectors, which for years have posted consistent, double-digit growth that reflected consumers' increasing reliance on the Web to research products and make purchases.

The IAB and PricewaterhouseCoopers aren't alone in finding an industry reeling from the downturn. IDC is predicting ad spending to drop by 5 percent in the first quarter.

Relative strength

Despite the slowing market, the findings show online advertising still posts some growth, at least -- making it among the strongest of the major media channels, said David Silverman, a partner in the entertainment, media and communications practice at PricewaterhouseCoopers.

The Internet is now the third largest ad-supported medium, marking its increasing significance to marketers and consumers in a maturing industry, Silverman said during a Webcast presentation on the study's findings.

"The Internet started out at the bottom rung of the ladder 14 years ago, and is now the third-largest category, behind newspapers and TV, passing radio and consumer magazines," he said.

This supports what analysts have recently 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.

The industry had other reasons to celebrate as well. Fourth-quarter revenue totaled $6.1 billion, according to the IAB and PricewaterhouseCoopers -- marking the first time the interactive ad industry surpassed $6 billion in a single quarter. The figures represent a $154 million or 2.6 percent increase from 2007's fourth quarter, which had revenues of $5.9 billion.

Many believe that some Internet ad formats and deal are likely to fare better than others, however.

Signaling a trend toward more measurable ad venues as budgets shrink due to the recession, Silverman said it's not surprising that the study found performance-based advertising accounting for 57 percent of online ad spending -- up from 51 percent.

In a related finding, search remains the main driver of revenue growth, according to the report, which found that search experienced a 19.8-percent increase over 2007.

Search ads in particular are generally seen as more durable in the downturn 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. That may be one reason that display advertising remained flat last year, at about 33 percent of ad spending for both 2007 and 2008.

Search wasn't alone in faring well during the past year. Digital video, though still a small overall contributor at 3 percent of total online advertising, more than doubled its revenue with an increase from $324 million in 2007 to $734 million in 2008.

In terms of industry categories, retail advertising declined 3 percent year-over-year, while financial services fell 2 percent.

Yet, as in 2007, those categories remained two of the largest advertising categories in 2008, followed by computing and automotive ads. Consumer packaged goods, an industry historically slow to embrace interactive advertising, increased its share of total Internet ad revenues by 60 percent, compared to 2007.

Prof. Peter Fader of the Wharton School of the University of Pennsylvania, who joined Silverman during the Webcast presentation today, said CPG companies' growing embrace of the Internet ad market signals its overall health and maturity.

"Over one billion was spent on Internet advertising in the packaged goods category -- this was unthinkable even a few years ago," he said, "This is huge. It's a really good sign that very good things are going on here."

Fader also said interactive marketers are now better understanding how banner and branding campaigns work together instead of seeing the two formats as separate entities. He said that often, banner and other types of display ads may not result in clickthroughs, but do spur viewers into conducting product-related searches after seeing them, often with corresponding keywords.

"Action emerges over time across platforms, so advertisers need to get better at measuring that, instead of just going after immediate action with the mouse," he said.