Study: Online Advertising To More Than Double By 2005

In spite of its troubles during the past year, the online advertising industry is expected to see impressive growth during the next three years, according to a new study from GartnerG2.

According to the Stamford, Conn.-based research group, the Web ad industry will rake in $18.8 billion in 2005, up from $7.9 billion currently. For sellers of online media, that’s exceptionally good news, since Gartner also anticipates that other media — television, radio and print advertising, specifically — will see little, if any increase in revenues, and could actually see a decline.

Yet while online advertising might grow considerably, it will comprise only about 3 percent of the total ad market by 2005. Additionally, the top 0.7 percent of ad-supported Web sites also will continue to bring in 80 percent of the industry’s revenue, according to Gartner.

And with the figures confirming a slowing year-over-year growth — 15 percent by 2005, compared with 100 percent growth in 1998 — analysts said online media plays should diversify their revenue streams to stay alive long enough to capitalize on the industry’s future revenue growth.

“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.”

Gartner recommended online media players take a long, hard look at business services, subscriptions, licensing, e-commerce and international expansion to supplant short-term shortcomings in ad revenue.

Business services, for instance, could prove a big potential money-maker. The strategies also could bring in short-term income while expanding user bases, resulting in 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.”

Several of the major Web portals have already taken such advice to heart, having unveiled new business services or subscription offerings during recent quarters, which they expect to become major sources of income in the future — and buffers for advertising losses in the near term.

Chief among those efforts are initiatives by Yahoo, whose chief executive, Terry Semel, said earlier this month that the company ultimately will make up to half its revenue from non-advertising sources. In recent months, the firm stepped up its efforts to provide streaming media services for marketers, enterprise software for businesses, and fee-based tools for consumers to design their homepages or customize their personal ads.

Another strategy that Gartner suggests Web sites explore to maximize their ad revenue is to expand into other interactive media. Doing so would help them better attract advertisers: according to the research firm, as much as 80 percent of agency requests for proposals include some form of integrated media package.

“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.”