Merrill: Big Firms Fueling Better-Than-Expected Year

It’s a mixed bag from the online ad industry-watchers at Merrill Lynch:
based on promising quarterly reports from some companies, the investment
bank is raising its estimates for this year’s online ad market, even though
it now sees recovery further off than it did back in March.

First, the good news. Merrill’s Henry Blodget, Lauren Rich Fine and Eve
Glatt say that the year’s performance for the industry is looking better
than expected, despite the turmoil.

For one thing, the analysts said that AOL Time Warner’s “solid”
year-over-year growth continues to fuel the online advertising economy,
accounting as it does for nearly 45 percent of all Web ad revenue. As a
result, the analysts said they were raising their market estimate for the
balance of 2001 — from $6.1 billion to $6.5 billion.

For players in the space, that’s a promising report, albeit well below
year-ago levels: Merrill’s old figures represent a 12 percent year-to-year
decline. Now, that expected market reduction is cut to seven percent. So
far this year, Merrill said the online ad market declined about 3 percent
from first quarter, and 6 percent from the first half of last year.

According to Merrill, the performances of leading players like AOL are
helping to stave off a major loss for the entire industry. Including AOL,
the big portals saw an average of 5 percent year-over-year revenue growth in
second quarter — although that’s still down 3 percent sequentially., AOL and Homestore were the biggest winners this quarter, added the

That’s the good news in an otherwise somber report. Merrill continues to
expect the industry to return to growth next year, but, in spite of the
promising performances by the largest firms, the pace of recovery will be
slower that Merrill had predicted earlier this year.

Pointing to the overall state of the economy and a dearth of any signs of
pickup in advertising, the firm now predicts first quarter 2002 revenues to
be flat or slightly down from fourth quarter, with the rest of the year to
show “more muted” growth than previous estimates.

Merrill had earlier been forecasting a 20 to 25 percent bump in online ad
spending, about twice what the firm is now expecting.

Likewise, the company is also lowering its 2002 estimate for the industry
to $7.3 billion, from $8 billion.

That’s because market leader AOL’s growth could run into stumbling
blocks, according to Merrill. While it now controls about 44 percent of the
market (up from 33 percent last year), the company’s 26 percent revenue
increase is largely attributable to its dependency on increasing market
share — rather than commanding higher prices from advertisers. As a
result, the analysts are doubtful over whether AOL will be able to maintain
its market growth and achieve a 52 percent share by fourth quarter.

Meanwhile, DoubleClick saw overall year-to-year quarterly revenue growth
but, in spite of its new focus on e-mail marketing and technology, is still
at the mercy of shrinking online media spending, which the analysts said
will result in a slower rebound than AOL and Yahoo! will experience.

Merrill’s doubled-edged report — which in spite of Blodget’s reputation
as an Internet bull, features predictions among the most conservative of the
investment banks’ estimates — comes as several other prominent
industry-watchers are issuing their own takes on the future of the battered

Earlier this month, Myers Reports released numbers forecasting a ten
percent growth in online ad spending, to about $4.73 billion. And last week,
eMarketer chimed in with predictions of a 7 percent increase in industry
revenue during 2001, to $7.6 billion — almost twice Myers’ total.

While the firms’ reports all point to some evidence of a turnaround in
online advertising, such widely differing figures illustrate the problems of
accurately measuring spending on online advertising.

For its part, Merrill itself admits to having encountered some
difficulties in getting its figures. Previously, the firm used third-party
sources in its calculations, but said this week that it abandoned those
figures because of their inconsistency. Now, Merrill is now using its own
figures, based on the 20 companies for which it has data (including several
for which it managed an IPO). Using its new methodology, the company’s
figures for ad spending in 2000 dropped about $1 billion, to $6.9 billion.

Merrill didn’t specify which provider was at fault, but Blodget has said
in the past that some of his data had been based on numbers provided by the
Interactive Advertising Bureau and PriceWaterhouseCoopers.

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