It's Diversify or Die for Online Media Firms

There’s still considerable growth ahead for the online advertising market, but at 3 percent of the total advertising market it’s not enough to support companies that don’t diversify, GartnerG2 found.

By 2005, online advertising will be an $18.8 billion market in the United States, GartnerG2 predicts, up from $7.9 billion in 2001. These numbers are in the neighborhood of the Interactive Advertising Bureau’s stats, which put 2000 online ad spending at $8.2 billion and at $5.55 billion through three quarters of 2001.

The dilemma facing media companies is that the online advertising growth expected in coming years will occur in the relatively small online ad market, while advertising growth remains flat or receding in TV, radio and print. GartnerG2 estimates that out of the 2,800 sites selling advertising in the United States, the top 20 sites receive 80 percent of the revenue. GartnerG2 also forecasts that year-over-year growth in online advertising will be just 15 percent by 2005, compared with 100 percent in 1998. The solution for companies that want to stay alive and grow revenue is clear, according to GartnerG2 — diversify.

“Due to decreased growth and market domination by the top players, online media firms must diversify their products and services to supplement the income they expected to receive from online advertising,” said Denise Garcia, research director for GartnerG2. “Diversification is the future for this industry, so those who do not branch out will see their online advertising revenues decrease and their user bases deteriorate.”

According to GartnerG2, there are five additional revenue streams that online media can implement to make up for the lack of advertising revenue: business services, subscriptions, licensing, e-commerce and international expansion. Business services, which encompasses customized enterprise software services, audio/video streaming, store hosting, and management and Web site tools and services is predicted to be the largest area for revenue growth, followed by subscriptions.

All five revenue areas would help online media businesses solve advertising growth challenges by expanding user bases, obtaining better demographic and targeting information from user registrations and ultimately supporting sales to advertisers.

“One benefit of expanding into business services is that media companies can dramatically expand their user bases to include business users by adding features and services such as audio/video streaming and corporate portals,” Garcia said. “They can then use that new user base for advertising by selling ads targeted to business audience at rates significantly higher than those for ads to their consumer audiences.”

Diversification presents a new set of problems as well, such as growing the user base, marketing that base to advertisers and expanding into other forms of advertising. But media firms could be pushed into diversification by advertisers,o r alternatively they can risk losing advertising dollars to companies with more diverse offerings. According to GartnerG2, as many as 80 percent of agency requests for proposal include requests for integrated marketing proposals.

“Advertisers are increasingly demanding unique, creative, integrated advertising programs that require online media properties to expand into other forms of interactive media such as interactive TV, wireless and kiosks,” Garcia said. “Expanding distribution channels for advertisers not only provides opportunities for increased advertising revenue, but creates additional revenue opportunities overall.”

The most famous recent example of media diversification is the acquisition of Time Warner by AOL. According to GartnerG2, however, the combined AOL-Time Warner’s dependence on advertising revenue has remained unchanged from pro forma 2000-2001 at 25 percent. In fact, the collected advertising-related revenue of the top five media companies increased 1 percent over last year, account for nearly half of their collective bottom-line growth.