Merrill: Online Ad Market to Decrease 25% in 2001

Things are going from bad to worse in the online advertising market.

That’s the assessment by industry-watchers at Merrill Lynch, including the firm’s famed Henry Blodget, who said in a conference call that he’s predicting online advertising revenues to actually decrease 25 percent during the year.

The new forecast comes only two months after Blodget released a report concluding that ad revenues would remain flat from 2000, at about $7.9 billion. Previously, Blodget also had said he expected first quarter 2001 would be the ad spending “trough,” with a sequential decline of about 10 to 15 percent from fourth quarter.

Blodget also predicted at the time “modest sequential increases” beginning in second quarter of 2001.

Those predictions are now out the window, as Blodget and cohorts Kirsten Campbell and Eve Glatt predict the market won’t have worked itself out until near the end of the year.

The Merrill analysts said they still consider most of the online ad players and publishers to have overly optimistic full-year earnings predictions, which are likely to be cut in coming months. Companies that Blodget singled out for possible reductions in guidance include Terra Lycos and ValueClick.

While Blodget and company predicted that most companies would post year-to-year declines in revenues, some players will be able to capture new market share as weaker companies drop out.

During the year, Blodget said he believed market share would shift toward “top sites,” online direct marketing firms specializing in email marketing and link sharing, and pay-for-performance companies. AOL Time Warner’s online properties also would continue to gain share in 2001, according to the report, expanding from 38 to 45 percent.

Yahoo, however, wouldn’t be one of those expanding its piece of the pie: Blodget said he expected the Santa Clara, Calif.-based online portal’s market share to fall 16 to 11 percent, through a decline in long-term contracts and continued weakness in its banner sales.

Blodget did, however, reiterate his belief that the present soft online market is cyclical rather than an intrinsic weakness of the sector — and is the result of “a brutal correction from a severely over-capitalized market in 1999 and 2000.”

In addition to 20 to 30 percent growth during 2002, Blodget again predicted a fewer number of stronger players — who increasingly are using larger ad units.

As with his earlier estimates, Blodget and others based their models largely on trend data from PricewaterhouseCoopers/Internet Advertising Bureau’s historical estimates of online ad spending, as well as revenue projections and histories of the major players in the sector.

However, critics of the New York-based IAB often allege that the industry-sponsored association grossly overstates the market’s revenues, ostensibly in support of the fledgling Web ad industry. If that’s the case, the near-term situation looks gloomier still.

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