Blodget: Online Ad Industry OK, Thanks to AOL

AOL Time Warner’s recent efforts at leveraging its new cross-media properties are paying off, says Merrill Lynch’s Henry Blodget — and that performance could contribute to AOL’s domination of the market once the industry works its way out of its current slump.

As a result of its first-quarter performance, the closely-watched Internet analyst said he sees AOL not only remaining the largest player in online media, but actually buoying the rest of the industry in the meantime.

AOL’s performance was so strong, relatively, that overall industry performance during first quarter topped his expectations of a 35 percent revenue decline from fourth quarter. While most players in the space posted declining quarterly revenues between 20 to 50 percent, AOL’s 5 percent revenue increase cut the sequential decline to 20 percent, or $1.6 billion.

It’s the first time in nine months that the market exceeded estimates, said Blodget, who reduced his first quarter and full-year 2001 industry revenue predictions in January.

The news made Blodget comfortable enough to say he believes that the market is bottoming, and predicted sequential growth to resume again by fourth quarter, with healthy 20 to 30 percent annual growth starting in 2002.

But does a rising tide raise all boats? The signs are mixed, and Blodget continues to see shakeout down the road for all but a few large players.

One reason is that revenue is consolidating into the hands of a decreasing number of Web publishers. The seven largest publishers captured 78 percent of total spending, up from 75 percent in the previous quarter. Of all companies involved in online ad sales, the top nine brought in 84 percent of the income, up 4 percent from last quarter. And those trends are expected to continue, Blodget wrote in a research note Tuesday.

But the future landscape of the online marketing will likely be even more skewed. Of the largest publishers, AOL remains the market leader by a wide margin, gaining share at an accelerating rate as competitors lose. Accordingly, AOL garners about 46 percent of all online ad dollars — up 10 percent from fourth quarter.

Meanwhile, close competitor Yahoo’s online ad share declined by about 5 percent in the quarter, to 10 percent. Blodget calculated that the other big players — which includes Yahoo and other large players like Excite@Home, MSN and DoubleClick — saw aggregate revenue decline about 29 percent since last quarter.

Outside of online marketing’s “top 10” players, the situation is even more dire, with revenue decreasing 33 percent sequentially during first quarter.

“Even the top non-AOL market leaders however, continue to gain share relative to the rest of the industry,” Blodget wrote. “Advertisers continue to gravitate toward larger companies, despite deep price-cutting by smaller sites. ”

Indeed, Blodget wrote that one of the factors helping the market find its bottom will be an end to “irrational competition.”

Blodget didn’t change his estimate of a decline of 25 percent in 2001 revenues, which would bring the revenue number to $6 billion, though he said his prediction is likely “conservative.”

“Longer-term, we are still believers in online marketing,” he wrote. “We continue to believe the current weakness is the result of a brutal cyclical correction, not a secular downturn.”

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