Internet ad revenues: How low can they go?

Posted 05 June 2009 17:00pm by Meghan Keane with 1 comment

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In a matter of months, predictions for online advertising growth have slowed, stalled, and retreated. And now that we're getting results for the first quarter of 2009, it is clear that online advertising is not immune to market forces.

According to the Internet Advertising Bureau, advertising revenues online have officially taken a dip this year. In the first three months of 2009, ad revenue online fell 5% to $5.5 billion.

While analysts are mixed on whether the online market will rebound by the end of the year, falling revenues online spell bigger trouble for the market as a whole. The online share of the ad market is predicted to rise slightly this year, ending 2009 with 9.4% of total U.S. ad budgets versus last year's 8.7%.

Many analysts are predicting a rebound for the market in the second half of the year, which will result in a small bounce for the online ad space. ZenithOptimedia predicts 4.5% growth, eMarketer 4.5%, Barclays 2.3%, BernsteinResearch 5.9%, UBS 1.4 percent, and JP Morgan as much as 10%. But analysts at Cowen & Co. predict revenue drops of as much as 6% in the space this year.

Cowen estimates that online advertising will eventually make up about 25% of the overall ad market, and search's strength in the market will only grow. Cowen predicts that paid search will shift from a 5% share of the global ad market to a 15% share.

But as traditional media companies are moving ad business online, it increasingly looks like there will be less money being spent overall.

Initial declines in the online ad market have been attributed to larger economic forces hitting the country. Randall Rothenberg, CEO
of the IAB, said as much today:

“Interactive advertising has taken its rightful place as a fixture on marketing plans across sectors, which means we aren’t immune to broader economic trends."

But if the market doesn't rebound by the end of the year, it could represent a trend in advertising — that the shift of ad dollars online is helping to shrin the overall ad spend, instead of replacing it.

The fact that large advertisers are increasingly moving their campaigns online was expected to protect the online space from the downturn, but evidence of online ad dollars shrinking points to a greater weakness in the market that may not be fixed when the economy eventually rebounds.