Online Ad Growth Declines in First Half 2008

As online ad forecasts for 2008 get slashed, new numbers from the Interactive Advertising Bureau and PricewaterhouseCoopers show a steady drop in the rate of online ad spending growth. Despite the economic downturn and slowing growth, more money continues to flow to the Web because of the medium’s strong measurement capabilities.

In the first half of this year, $11.5 billion was spent on online ads, representing an increase of over 15 percent over the same period of 2007. That increase seems feeble when compared to 2006, when first half Web ad revenues rocketed up 37 percent over the same period in 2005. Last year, first half growth slowed to about 26 percent over 2006.

David Silverman, audit partner at PricewaterhouseCoopers’ Technology Industry Group, speculated online ad revenues will total between $22 billion and $25 billion this year.

Web ad spending in the second quarter rose almost 13 percent over Q2 2007 to $5.7 billion, but decreased 0.3 percent from the first quarter of this year.

“This is probably quite reasonable and certainly not unexpected” given the current economic environment, said Silverman of the slight quarter-to-quarter drop. “Fundamentals for strong growth in this sector still remain,” he added.

Silverman pointed to reductions in online ad expenditures by retailers, leisure travel advertisers, financial firms, and media companies. However, auto, computing, telecom, and consumer-packaged goods advertisers spent more on the Web in the first half of the year, “due to efficiencies in the Internet advertising space and a shift in offline to online dollars,” he said.

Spending on search and display, the dominant ad formats, gained some ground. Search revenues, accounting for 44 percent of all online ad spending, rose to $5.1 billion, up 24 percent over the initial half of 2007. Display spending — 33 percent of all online ad revenues — went up around 19 percent to $3.8 billion in the first half of this year. Banner ads accounted for the majority of that display ad cash (21 percent), while the remainder of display ad spending went towards rich media (7 percent), video (3 percent) and sponsorships (2 percent).

Spending on online classifieds decreased from 17 percent to 14 percent in the first half of 2008. Lead generation ad spending edged down a bit from 8 percent to 7 percent, and e-mail stayed flat at 2 percent of online ad spending.

Sponsorship revenues have declined 8 percent since 2004, according to Silverman, calling it “the result of advertisers moving to more measurable and potentially efficient categories.”

Indeed, performance-based pricing models continue to flourish. Performance-based ads, such as cost-per-click or cost-per-acquisition ads accounted for 52 percent of ads sold in the first six months of this year, up from 50 percent in the first half of 2007. Meanwhile, CPM-based ad spending dropped slightly from 45 percent to 44 percent.

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