IDC: Internet Ad Spending Spared by Troubled Economy

Internet advertising revenue in the United States reached $7.1 billion in the first quarter of 2008, a jump of nearly 24 percent compared to the same quarter in 2007, according to IDC.

The research company said the figures show the economic slowdown crushing many other industries in the nation has not had an adverse impact on online advertising. In fact, IDC said it expects Internet advertising to rapidly grow throughout the rest of the year despite a general pullback in overall ad spending.

While IDC said market leader Google has seen its growth rate decline due to the maturation of search marketing, its main product, Google continued to outpace its competition during Q1. IDC said Google’s domestic net revenue continued to grow faster, on a year-to-year basis, than most other Internet companies.

IDC estimates Google’s net U.S. ad market share, which was 23.1 percent in the first quarter of 2007, reached 24.8 percent during Q1 of this year. The findings are part of a new IDC report: “U.S. New Media Quarterly Wrap-Up 1Q08: Internet Advertising Not Affected by Economic Woes.”

The difficult economy will force companies to cut ad spending across all media by as much as 7 percent for 2008, estimates IDC. Nevertheless, the firm predicts quarterly online advertising growth will increase between 15 percent and 20 percent in each of the remaining three quarters this year; it also expects Internet ad spending will more than double in five years.

“The first-quarter growth rate was where IDC would have expected it even without the subprime mortgage crisis,” said Karsten Weide, IDC digital marketplace and new media program director. “We will likely see the current situation accelerating the shift of advertising budgets from traditional media into new media.”

He said Google, even with slower growth rates, “is bound to remain the number one new media company in the United States” for the next five years “bar some dramatic disruptions of the marketplace.” Some of Yahoo’s turnaround efforts seemed to pay off, said Weide, noting the company’s U.S. ad sales growth on its own services continued to accelerate. However, he said Yahoo’s progress was offset “by anemic growth of its third-party advertising network, Panama.”

Meanwhile, Microsoft showed some “impressively increased U.S. ad sales growth rates in the past several quarters after years of close-to-zero growth in a market that grew at 30 percent annually,” noted Weide. “It may be that Microsoft has fixed its ad sales problems for good.”

A bad economy forces advertisers to save money by eliminating the least-effective forms, thus speeding up the adoption of new media advertising, he said.

IDC recently issued an Internet ad forecast that made similar points. It contended the economic downturn is actually helping the Internet marketing industry and IDC predicted the overall Internet ad revenue will double from $25.5 billion in 2007 to $51.1 billion in 2012.

Weide said the new report essentially supports the prediction made in the prior one. He said the new report “wraps up actual public earnings numbers for 1Q,” which he characterized as being “encouraging,” and it “reaffirms the earlier prognosis that this year will be strong despite the economic trouble.”

Weide said that, during economic downturns, chief financial officers “decide that money needs to be saved” and usually cut the marketing department first “So the pressure is on for the marketing guys to provide the same marketing effectiveness with less money,” said the analyst. “And when they look around which medium is more effective than others, they look at the Internet.”

That’s because Internet ads find more engaged users, are better targetable, more accountable and are interactive, said Weide.

The firm predicts the Internet’s share of the overall U.S. advertising market will increase from 8.6 percent to 15.6 percent during the period and will be second only to direct marketing by 2012.

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