Following a sobering end to the third quarter, a prominent Internet analyst is cutting his spending forecast for the online advertising segment for the second time in two months.
J.P. Morgan’s Imran Khan released his revised analysis this morning, noting that advertisers have been cutting their budgets across the board, particularly during the last two weeks of the quarter. So while advertisers continue to shift spending from offline channels to the Web, the overall depressive effect is undermining growth rates.
Under the updated figures, Khan expects 25 percent annual spending growth for 2008, backing off his previous prediction of 28 percent. Looking ahead to 2009, Khan is forecasting 13 percent year-over-year growth, down from his earlier estimate of 19 percent growth.
The revised analysis is based on reports from online advertising firms of an accelerated drop in branded display advertising, while spending on search advertising is taking a hit as well, especially in key verticals such as automotive, travel, telecom and retail.
Search advertising is typically better insulated from an economic downturn than display advertising, largely because it offers a more measurable return on investment. Display advertising, which is generally used as a brand-building mechanism, is commonly sold at a rate set by the cost per thousand impressions (CPM). Search, by contrast, is sold on a cost-per-click basis, so advertisers only pay when a user takes a measurable action.
Khan is expecting CPM rates to remain flat or slightly down as publishers struggle to sell through their premium inventory. He is especially pessimistic about next year, cutting his spending estimate for the domestic display segment from $9.43 billion to $8.45 billion. By those numbers, the forecasted growth rate would slip from 16 percent to 6 percent.
A more positive report came from the Rubicon Project, an advertising-technology firm that automates the relationship between buyers and sellers. Rubicon’s third-quarter report, released this morning, took a more cheerful tone in its market assessment, proclaiming that “the sky is not falling on online advertising.”
Rubicon played up the same secular shift of ad dollars moving from traditional media to the Web that Khan identified, and noted that even in a harsh investor climate, venture capitalists still poured in $241 million into startup ad networks in the third quarter.
Still, Rubicon’s market analysis couldn’t hide the beating that display advertising. In aggregate, advertisers continue to ramp up their online presence through branded advertising, but the individual placements are getting cheaper. Rubicon found that average CPM rates in the third quarter dropped 11 percent from the previous period.
On the social networks, where display advertising is already inexpensive, CPM rates fell another 3 percent.
One bright spot came for newspapers, as Rubicon found that CPM rates for news and reference sites increased 36 percent in the third quarter over the previous period.
