Online Advertising Grows by 27 Percent in 2007, IDC Says

If you picked a career in Internet advertising you made a wise decision. Online advertising grew 27 percent last year, making it a sector unlikely to be affected even if the U.S. economy capsizes this year, according to an IDC analyst.

In discussing the company’s latest quarterly report about Internet advertising, IDC analyst Karsten Weide said businesses affected by the slowing U.S. economy will slash other advertising budgets before paring their online campaigns. “We think there will be some effect on ad spending overall, but we think online ad spending will almost be unaffected even if there’s a depression,” he said.

For the first time ever, IDC’s research found Google actually lost a bit of market share. “Their domestic sales growth has slowed down,” the analyst said. Google’s net U.S. market share was down 0.5 percentage points to 23.7 last quarter compared to the prior quarter. “It was 50 percent in Q3 and only 40 percent in Q4,” said Weide. “They’re still outperforming everybody but FIM [in terms of growth rate],” he said, referring to Fox Interactive Media. “But the growth is just not fast enough anymore to sustain the current market share.”

Internet ad spending totaled $7.3 billion for the fourth-quarter of 2007, about 28 percent more than the same period in 2006, according to IDC. For the 2007 calendar year, it reached $25.5 billion, representing year-over-year growth of 27 percent.

Weide, program director for IDC’s Digital Marketplace: Media and Entertainment service, said IDC’s numbers represent only “spending on ad space” and do not include “all the other stuff like creative, testing, media planning and measurement.”

Additionally, IDC estimates how much revenue was garnered by the large online media companies in the U.S. It says Google remained the big dog, snagging 23.7 percent of the market. Yahoo came in a distant second with 11.4 percent, followed by Microsoft’s 5.6 percent, AOL’s 5.2 percent, Fox Interactive Media at 3 percent and InterActive Corp. (IAC) with 1.5 percent.

“This is the net U.S. Internet advertising revenue share,” said Weide. “It does not count money these companies bill but subsequently pay out to partners. For instance, if you count everything Google bills to advertisers you come out with a gross market share of 33.4 percent. But they have to pay out a whole lot of that money to companies that are part of their ad network. It’s not money they keep and can spend on other stuff. Because we are looking at the financial might of these companies, we don’t count that in the current market share.” in the current market share.”

The analyst said he found Yahoo’s situation to be interesting. “Yahoo seems to have hit rock bottom, but in the past quarter they actually won some market share domestically,” said Weide. “Their domestic growth rate picked up quite a bit. It was 2 percent in Q1 last year and last quarter it was 22 percent. Yahoo gets a whole lot of bad press these days, but if you look at domestic growth they look pretty good. It’s pointing upward.”

If Yahoo ends up being swallowed by Microsoft, the combined company would have a net U.S. advertising market share of about 17 percent, said Weide.

For those who fear a coming recession and a repeat of the carnage that came seven years ago, when the so-called dot-com boom went bust, Weide has good news. “Everybody is looking back to the last recession which coincided with the crash of Web 1.0,” he said. “Back then, of course, online advertising decreased in real terms. Spending went down in absolute terms,” he said. IDC doesn’t expect that scenario to happen this time. Why? “Back then a lot of advertisers still saw online advertising as experimental and that’s not the case anymore. It’s a well accepted means of advertising now and in fact many advertisers say Internet advertising is more effective than other forms.”

One other tid-bit that should warm the hearts of those in the business: “Incidentally, our research shows the IAB [Interactive Advertising Bureau] numbers under-count the market,” said Weide. “They didn’t predict anything for 2007 yet, but if you apply their methodologies they come up with $6.9 billion for 2006 while we came out at $20.1 billion.”

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