Big Firms Fueling Better-Than-Expected Year

It’s a mixed bag from the online advertising industry-watchers at Merrill Lynch: based on promising quarterly reports from some companies, the investment bank is raising its estimates for this year’s online ad market, even though it now sees recovery further off than it did back in March.

First, the good news. Merrill’s Henry Blodget, Lauren Rich Fine and Eve Glatt say that the year’s performance for the industry is looking better than expected, despite the turmoil.

For one thing, the analysts said that AOL Time Warner’s “solid” year-over-year growth continues to fuel the online advertising economy, accounting as it does for nearly 45 percent of all Web ad revenue. As a result, the analysts said they were raising their market estimate for the balance of 2001 — from $6.1 billion to $6.5 billion.

For players in the space, that’s a promising report, albeit well below year-ago levels: Merrill’s old figures represent a 12 percent year-to-year decline. Now, that expected market reduction is cut to 7 percent. So far this year, Merrill said the online ad market declined about 3 percent from first quarter, and 6 percent from the first half of last year.

According to Merrill, the performances of leading players like AOL are helping to stave off a major loss for the entire industry. Including AOL, the big portals saw an average of 5 percent year-over-year revenue growth in second quarter — although that’s still down 3 percent sequentially., AOL and Homestore were the biggest winners this quarter, added the analysts.

That’s the good news in an otherwise somber report. Merrill continues to expect the industry to return to growth next year, but, in spite of the promising performances by the largest firms, the pace of recovery will be slower that Merrill had predicted earlier this year.

Pointing to the overall state of the economy and a dearth of any signs of pickup in advertising, the firm now predicts first quarter 2002 revenues to be flat or slightly down from fourth quarter, with the rest of the year to show “more muted” growth than previous estimates.

Merrill had earlier been forecasting a 20 to 25 percent bump in online ad spending, about twice what the firm is now expecting. Likewise, the company is also lowering its 2002 estimate for the industry to $7.3 billion, from $8 billion.

That’s because market leader AOL’s growth could run into stumbling blocks, according to Merrill. While it now controls about 44 percent of the market (up from 33 percent last year), the company’s 26 percent revenue increase is largely attributable to its dependency on increasing market share — rather than commanding higher prices from advertisers. As a result, the analysts are doubtful over whether AOL will be able to maintain its market growth and achieve a 52 percent share by fourth quarter.

Meanwhile, DoubleClick saw overall year-to-year quarterly revenue growth but, in spite of its new focus on email marketing and technology, is still at the mercy of shrinking online media spending, which the analysts said will result in a slower rebound than AOL and Yahoo will experience.

Merrill’s doubled-edged report — which in spite of Blodget’s reputation as an Internet bull, features predictions among the most conservative of the investment banks’ estimates — comes as several other prominent industry-watchers are issuing their own takes on the future of the battered industry.

Earlier this month, Myers Reports released numbers forecasting 10 percent growth in online ad spending, to about $4.73 billion. And last week, eMarketer chimed in with predictions of a 7 percent increase in industry revenue during 2001, to $7.6 billion — almost twice Myers’ total.

While the firms’ reports all point to some evidence of a turnaround in online advertising, such widely differing figures illustrate the problems of accurately measuring spending on online advertising.

For its part, Merrill itself admits to having encountered some difficulties in getting its figures. Previously, the firm used third-party sources in its calculations, but said this week that it abandoned those figures because of their inconsistency. Now, Merrill is now using its own figures, based on the 20 companies for which it has data (including several for which it managed an IPO). Using its new methodology, the company’s figures for ad spending in 2000 dropped about $1 billion, to $6.9 billion.

eMarketer forecasts online ad spending will reach $7.6 billion by year-end 2001, a relatively modest 7 percent increase from the $7.1 billion spent in 2000. Despite the recent economic downturn, online advertising expenditures will continue to grow; increasing to $10.3 billion in 2002 and by 2005 will top $23 billion.

“While projections for 2001 spending vary from $4.7 billion to $12.6 billion, based on different definitions and methodologies employed, eMarketer’s $7.6 billion reflects the ‘best fit’ with all of the available data, including the current economic realities,” said Geoffrey Ramsey, CEO of eMarketer.

Additional findings from eMarketer’s Online Advertising Report include:

  • CPM rates for banner ads continue to decline
  • Nearly three-quarters of Web advertising space goes unsold
  • More than 99.7 percent of banner ads are not clicked on, but research suggests that bigger banners are improving branding and direct-response metrics
  • Nearly 90 percent of online ads are direct-response oriented
  • The online medium garners 10 percent of consumers’ daily media usage, but only 2.9 percent of media dollars.

The current advertising slowdown continues to take its toll on all forms of media spending. Advertising spending for all media fell 5.9 percent for the first half of 2001 compared to first-half revenues in 2000, according to the latest figures from CMR.

CMR estimates that total ad spending for the first half of 2001 came in at just under $47.5 billion, compared to $50.4 billion for the same timeframe in 2000. Print media saw a significant drop-off in revenue for the first half of the year, with magazines down 4.5 percent and daily and Sunday newspapers down 6.6 and 10.4 percent, respectively. Network and spot television continue to be impacted by the economic downtown, with declines of approximately 2 and 15 percent, respectively, compared to the first half of 2000. Syndicated and cable television were the bright spots, showing gains of 5.1 and 4.6 percent respectively.

“Second quarter results are not much of a surprise. After we saw ad spending drop 5 percent during the first quarter, we certainly did not expect an upswing during the second quarter,” said David Peeler, president and CEO of CMR. “With the economy not showing near-term signs of rebounding, advertising will continue to fall victim to budget cuts within corporate America. Until the overall economy experiences a turn for the better, we cannot anticipate a positive change for the advertising landscape this year.”

Most of the nation’s top advertisers slashed their budgets during the first half of 2001. The top advertising spender, General Motors, cut 23.5 percent of its ad spending from the first half of last year, trimming $1.4 billion, bringing its budget down to $1.1 billion. Philip Morris, DaimlerChrysler and Walt Disney also dramatically cut spending. AOL Time Warner, on the other hand, upped its ad spending by more than 20 percent.

This report contains information from the CyberAtlas Newsletter from Sept. 4, 2001. Don’t get the CyberAtlas Newsletter? Sign up today.

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