Forecast: Search to Lose Share as Video Ads Proliferate

An IDC Internet advertising report forecasts advertising online to nearly double by 2011. Search is expected to lose its dominance as broadband adoption increases demand for video and rich media advertising.

Internet advertising, including search, display, and rich media units, is projected to grow from $16.9 billion in 2006 to $31.3 billion in 2011. Growth will occur at a compound annual growth rate of 13.5 percent. At this pace, the report states the growth of Internet advertising will be three times as fast as that of the overall ad spend.

Recent quarterly reports and 2007 forecasts show curtailed spending across all advertising, though online continues to exhibit growth as dollars move to the Internet from other media.

“The major source of growth in the Internet area is from advertising budgets being moved from traditional to online media,” said Karsten Weide, program director, Digital Marketplace: New Media and Entertainment at IDC. “At the biggest risk are newspapers and broadcast television; every single traditional media will lose revenue to online advertising.”

Search will command most dollars spent in online advertising throughout the five-year forecast period, though its share is expected to decline from 40 percent in 2006 to 32 percent in 2011. Absolute spending in search will continue to increase, despite the drop in market share.

Video and rich media formats are expected to gain share. Broadband adoption means increased demand for video and richer Web activities, increasing the demand for video ad units.

“Right now there are inventory issues. If you talk to companies like AOL or Microsoft, they will tell you demand is higher than supply in terms of ad inventory,” said Weide. “We assume that publishers will manage to supply the demand.” Weide said video ads are currently more expensive than TV in terms of CPM.

The report suggests Google, and to a lesser extent Yahoo, will suffer as the search market loses ground to other online advertising formats. Weide called the forthcoming decline in search a “strategic challenge to them. They are trying to tackle this problem.”

Google’s efforts include the acquisition of YouTube and pending acquisition of DoubleClick. “The jury is still out on whether YouTube will pay off as an ad medium the way they hoped it would,” Weide said, commenting on the difficulties of selling against user-uploaded video where the content is not yet attractive to big brands. “So far [the content is] grainy home videos and stolen content.”

The DoubleClick acquisition is a move toward staking a claim on display advertising, which is down to about 20 percent of market share in the online advertising space. “Kudos to them, they are tackling those weaknesses,” Weide said. “It’s certainly a step in the right direction for Google, which is the bottom line.”

Referral ads and lead generation are also expected to grow at the expense of search. “Advertisers that used to do search ads [will] take it a step further and go to shopping comparison sites. What these services give the advertisers is [that] the users are ready to make a purchase,” Weide said.