February 6th, 2008

Net Ad Growth to Continue, Deal or Not

By Anick Jesdanun
Associated Press

Microsoft’s unsolicited bid for Yahoo underscores the strength of online advertising — and the confidence the market has that the relatively new industry can withstand an economic downturn.

Originally valued at $44.6 billion and worth about $40 billion based on Tuesday’s closing prices, the bid is a bold statement on the promise of online advertising.

“Forty-four billion dollars is a great testimonial to the great power of this marketplace,” said Jarvis Coffin, chief executive of advertising distributor Burst Media Corp. “The market is saying, `I don’t think we’re in a bubble. We’re in a period of intense growth that’s going to continue to grow for more years.’”

According to the Interactive Advertising Bureau, U.S. online ad spending grew about 25 percent through the first three quarters of last year, compared with the same period in 2006. Growth is steady in terms of dollars, though the growth rate is slowing as the size of the pie gets larger.

And there’s room for a lot more growth, analysts say, considering that by most accounts, the Internet accounts for less than 10 percent of all U.S. ad spending but more than 20 percent of the time Americans spend consuming media.

Ad spending on television — roughly 40 percent of the total — is about even with its consumption time. But the share of ad spending in newspapers and magazines exceeds their consumption time, said Elias Plishner, senior vice president for digital communications at the Universal McCann ad agency.

Thus, the Internet is likely to continue taking dollars from newspapers and magazines — even more so if an economic downturn reduces overall ad spending. Some spending might even shift from television if the writers strike continues and viewers start fleeing.

In addition, the Internet offers advertisers more tools than other media to track the performance of their spending, and technical improvements are leading to better targeting and thus higher fees.

“Let’s assume a worst-case scenario, a decline in the number of advertisers,” said Daniel Taylor, senior analyst at the Yankee Group. “They are willing to spend more because they are getting better responses. Revenue in the (online) industry is still likely going to go up.”

And that growth is bound to happen regardless of whether Microsoft and Yahoo combine or stay independent, analysts say.

“I don’t see how Microsoft and Yahoo coming together changes the landscape that dramatically for advertisers,” said Sarah Fay, chief executive of the Carat ad agency. “There’s still enough competition in the marketplace.”

Advertisers can now buy ads from Google, Microsoft, Yahoo or Time Warner Inc.’s AOL for display on those companies’ own sites or an affiliate’s. Advertisers also can buy directly from a Web site like The New York Times or across a smaller group of sites like those from Conde Nast or Scripps Networks.

A Microsoft-Yahoo deal could shift money away from Google if advertisers no longer associate lucrative text-based keyword ads only with Google, said Chuck Richard, lead analyst at market research firm Outsell Inc.

“It suddenly wakes people up, `Oh, Microsoft does advertising,’” Richard said. “To me the goal is to make this Coke vs. Pepsi. Right now it’s Coke vs. go thirsty. It’s either Google or nothing.”

Microsoft and Yahoo might succeed in bringing various ad formats and platforms under one roof, making it easier for advertisers to spend their dollars, said David Hallerman, a senior analyst with the research group eMarketer.

Even Google doesn’t have that — at least not until it wins European regulatory approval to buy DoubleClick Inc. and integrates the online ad distributor’s technologies. Google is relatively weak in display advertising and behavioral targeting — ads tied to surfing patterns rather than keywords. Yahoo and others have long been doing both.

Jonathan Sackett, chief digital officer with the Arnold Worldwide ad agency, said Microsoft is strong with desktop software and Yahoo in Web and mobile services. If somehow they could make all those platforms seamless, he said, advertisers could better reach consumers at the right time — such as through their cell phones while they’re watching television.

But he said that will take time and money to marry the three screens — without any guarantee of success.

And that lag may render a combined Microsoft and Yahoo no more than an asterisk as the overall industry grows.

“You could argue whether or not Microsoft is putting too much hope into Yahoo,” said Bob Davis, managing general partner of venture capital firm Highland Capital Partners. “I don’t think you can put too much hope into whether there’s too much in online advertising. We can debate and postulate about how fast it will grow but it will grow.”

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