Internet Advertising Revenues Will Increase By At Least 30% Internationally This Year – Some Countries Up 40 - 50% -- But Does The Yahoo Glitch Mean A US Growth Slowdown?

Philip M. Stone - October 2, 2006

Yahoo gave Wall Street a mighty fright by announcing its third-quarter revenues would come in at the low end of forecasts, with some analysts lopping as much as $400 million off their previous forecasts, but was Yahoo a glitch or a sign of worse to come?

According to eMarketer, a respected market research company concentrating on online sales activities, Yahoo’s warning is a sign that the 30%+ annual rates for US Internet advertising growth may be over. It has lowered its US forecast to 26.8% for this year, which, if it turns out to be true, will be the first time in several years that the figure is less than 30%.

And it is forecasting that next year the growth will be down to 15.1%, up slightly in 2008 to 17.5%, and then falling dramatically in 2009 to 9.8% and just 6.8% in 2010.

But before one weeps too much for the Internet players those types of increases still means that online advertising will be more than $25 billion by the end of 2010,  giving the Internet 8.9% of the total advertising spend, as compared to 5.7% this year.

And there is a positive in the advertising growth, according to eMarketer. Last year advertisers spent an average of $71.61 per Internet user, and the research company projects that figure will be $88.28 for this year and will be close to $100 per Internet user next year.

Confusing the eMarketer report is one by the Interactive Advertising Bureau and Pricewaterhouse Coopers that US Internet advertising rose 37% in the first six months to $7.9 billion, a new record. In the second quarter alone, revenues totaled nearly $4.1 billion, representing a 36% increase over same period in 2005, and a 5.5% increase over Q1 2006.

Thus for the eMarketer 2006 lower forecast to come true would mean that the third and fourth quarters will have to come in far lighter than expected – which is exactly what Yahoo has warned is happening there.

Search advertising remains responsible for 40% of all online dollars, bringing in  $3.16 billion in the first six months of 2006. While its share hasn’t changed, the revenue has grown 37 percent from $2.31 billion in the first half of 2005.

The problem seems to be in display advertising, with its share of the total Internet spend declining from 34% to 31%, but still valued at $2.53 billion. Large companies tend to concentrate on display advertising whereas  small businesses concentrate on search advertising. Classified ads share is about 20%, some $1.58 billion.

Several analysts believe eMarketer is being too pessimistic saying that even with the drop in display, some of that spend will find its way in other forms to successful web sites.

They also point out that Yahoo relies very much on financial services and automotive ads – both sectors are heavy into display advertising and both sectors have cut back – and Yahoo itself has given that very reason for its lower Q3 forecast. But Chrysler has announced a massive increase in 2nd half ad spending as it introduces eight new car models and other car companies are likely to do likewise, so what Yahoo may have lost from the auto sector in Q3 it could well get much of it back in Q4, but the more important financial services revenue will still lag. 

But one shouldn’t forget that with more and more broadband use that video advertising is becoming ever more the norm with some major sites actually saying they are sold out. David Silverman, a partner at PricewaterhouseCoopers, confirms the video trend. "While search advertising remains the largest format in terms of revenues, we expect to see new formats like video ads to continue to emerge as advertisers seek to leverage the branding opportunities afforded by the growing installed base of broadband users," he said.

So, is what may be happening in the US true internationally as well? Merrill Lynch recently increased its 2006 Internet international ad growth forecast from 33% to 35% -- about $11.6 billion. But for next year, where it had projected a 25% growth, it has lowered it to 24%, still a spend of some $14.5 billion.

Merrill’s report, which came out before Yahoo’s announcement, actually took aim at Yahoo, saying it believed that its share of international advertising will drop from 11% in 2005 to 10% this year.

Merrill believes, however, that Google is going from international strength to international strength. The report said that Google already has a 70% search market share in the UK, Germany and Italy.

China is expected to have the world’s largest growth in online spending this year – 50% -- according to the report. The UK comes next at 46.4% (newspapers and television there suffering flat or down spending can but weep at such figures except for what they can claw back for their own Internet sites), and France comes third at 45%.

What it all boils down is that these days traditional media struggles to turn a single figure percentage ad increase each year whereas Internet analysts are arguing whether Internet growth can continue above 30% annually or might it slip back a bit. 

Where would you invest?

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