IAB: Online Ad Rebound Underway

The online ad industry turned the corner in the second half of 2002, helped by the red-hot paid search market, the emergence of rich media, and robust ad sales from top publishers, according to new industry figures.

The Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC) found the Internet advertising market made a strong comeback in the fourth quarter. Spending increased 9 percent from the previous quarter to $1.6 billion, equaling the total from the year earlier period. For the full year, the Internet advertising industry took in $6.0 billion in revenue in 2002, a 16 percent slide from the year before.

The report, compiled by PwC through a survey of top industry players, accounted for the large restatements made by AOL last year by knocking off $77 million from its 2001 revenue report and $138 million from 2002.

Still, the IAB and PwC found signs that the long decline in the Internet advertising industry finally ended last year. One of the key drivers of this growth has been the emergence of paid search. The keyword advertising market more than doubled in 2002, bringing in $635 million in 2002. Overall, it represented 15 percent of the online ad industry — a proportion that the IAB and PwC expect will only increase. As a sign of its momentum, paid search accounted for more than a fifth of all online ad spending in the fourth quarter.

The strength of keyword advertising made up for the disappointing performance of the Internet’s traditional ad units: banners and sponsorships. Banners brought in $1.7 billion, a 33 percent decline from a year earlier; sponsorships were down 40 percent to $1.1 billion.

“That’s a good news/bad news situation: the sellers and buyers are experimenting with different formats,” said Pete Petrusky, director of new media at PwC. “One of the biggest undercurrents that’s driving the industry now is going to be the adoption of high-speed broadband.”

With 14.2 million broadband subscribers at the end of 2002, more advertisers have turned to flashier online ads for branding purposes, rather than traditional direct response. For the year, rich media spending increased 18 percent to $212 million.

In a separate report, using slightly different methodology, PwC concludes that the online ad industry will continue to claw its way back. In 2006, online ad revenue should finally return to the boom-time levels of 2000. By 2007, PwC forecasts online advertising spending will reach $9.3 billion.

A number of factors set the stage for the comeback. Broadband will continue to wend its way into homes, making rich media more attractive and tethering people to their computers more with always-on access. The online ad industry will continue to improve its metrics, like reach and frequency, to give advertisers a better comparison with traditional forms of marketing.

The report meshes with recent evidence that the online advertising industry is growing at a steady clip. On Tuesday, Goldman Sachs issued a bullish report on the industry, citing Yahoo as a catalyst for an eventual industry-wide recovery in 2003. The IAB and PwC found the top 10 publishers accounted for 72 percent of ad revenues in the fourth quarter.

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