Report Predicts Higher Graphical Ad CPMs, More Growth for Search and Ad Networks

In a 312-page report offering predictions on everything from online ad revenues to e-commerce trends and the virtual worlds for kids, the JPMorgan equity research team said it expects the online graphical ad market to improve and raised its global search revenue estimate to $30.5 billion from $26.2 billion.

In the report, “Nothing But Net,” JPMorgan analyst Imran Khan and his team said “blended CPM pricing bottomed out” in 2007, partly due to the glut of non-premium ad space made available through social networking sites like MySpace and Facebook, but predicted an improvement in 2008 as technology matures.

“Social networking sites, as a general rule, have not been able to command very high advertising rates for their page view inventory,” Khan states in the report. “As time goes on, however, we believe social networks will develop better targeting and monetization of their page view inventory. Given the wealth of personalized information available to the sites, there are powerful avenues for improved monetization, although the technology remains fairly nascent.”

The report stated the increase in global search revenue will be due to paid search growing internationally, and a general increase in Web usage and price inflation. It also stated Google is still the clear leader in the space, with a 73 percent dollar market share, but that it may fall to 71 percent by the end of 2008 due to improvements at Yahoo and as AOL and Ask have renegotiated their Traffic Acquisition Costs (TAC) rates.

The report also predicted that the U.S. graphical advertising market will grow 19.9 percent and that the global ad market will grow 22.1 percent in 2008. The expected growth is attributed to improved targeting techniques, the rise of ad exchanges and a continued increase in time spent on social networking sites. The report also predicted a surge from the 2008 Presidential race, as political interest groups and candidates spend online.

As Internet users continue to spend their time on multiple sites, blogs, social networks, games and other online activities, ad networks and ad exchanges will attract more spending and acquisitions, according to the report, which finds advertisers are struggling to reach their target audience and can no longer count on larger portals alone.

“In the ad network and ad exchange space, we expect the need for scale to lead to continued consolidation and M&A activity, although perhaps not at the scale we have witnessed in [2007], most sizably with the DoubleClick and aQuantive transactions,” the report states.

The report also cited the nascent area of virtual worlds and advertising, specifically noting the purchase of Club Penguin by Disney. It predicted a strong growth area for kid oriented virtual worlds, but less of a rosy future for adult oriented sites.

“We are bullish on sites for children. Virtual worlds present parents an opportunity to let their kids play online and interact in a closed environment that is perceived as safe, especially when sites are operated by companies with trusted brands,” it states. “We think sites aimed at adults have yet to prove mainstream appeal.”