Online Economics - 2006 Annual Report

Growth in 2005

In 2004, the headline was the online ad industry’s rapid recovery from the boom and bust of 2000. Preliminary data for 2005 suggest that the online ad market is still growing very rapidly.

According to data from the Interactive Advertising Bureau and Pricewaterhouse Coopers, online ad sales were expected to surpass $12.5 billion for all of 2005. This number represents a 30% increase over the $9.6 billion recorded in 2004.1 2

And many of the country’s largest advertisers moved more of their ad dollars online. For example, the Ford Motor Company reportedly shifted 15% of its billion-dollar ad budget to the Web. As Greg Stuart, CEO of the Internet Advertising Bureau, said, “At a certain point, the Internet isn’t just a rational business decision [for brands]. It’s part of a big advertising idea.”3

Explaining Online Ad Growth

What accounts for such strong growth, besides the obvious increases in online audience numbers?

From the start, online advertisers have been lured by the ability to track their ads with greater detail and accountability than they can in any other medium. While advertisers in platforms like television and print could only estimate how many eyeballs were exposed to their ads, the Internet allows them to make a more precise measurement. Of course, counting the number of clicks is the most basic way to assess online advertising strategies, but advertisers also use such metrics as average frequency of exposures, ad exposure time, ad interaction rate, and view-through rate.4

In 2005, the Internet continued to uphold its claim as one of the most accountable advertising platforms with the emergence of some new marketing programs. Akamai, a technology company headquartered in Cambridge, Mass. developed new software that allows advertisers to look at audience spikes during certain big news events. Akamai’s chief executive, Paul Sagan, hopes that the service “can be used to help reveal geographic and sociological trends in public spectacles,” adding that “data generated by the index can be used by advertisers and investors to map social patterns and make buying decisions.”5

And in November, Google began offering Google Analytics as free software that allows customers to track how often Internet users click on ads that appear after a search is conducted.6

Looking Ahead

Beyond 2005, the evidence suggests online advertising should continue to grow. The rate of growth may slow, however, according to at least one research organization. Emarketer, a New York-based market research firm, is now projecting that from 2006 to 2009, online ad spending will decline each year: by 21.2%, 14.1%, 13.5%, and 10.4%, respectively.7

“No medium before the Internet had more than 32% increases (the growth for 2004) after it had been around for a few years,” the EMarketer analyst David Hallerman said. “Runaway growth isn’t all that good, since it could end up like the early years of the Internet — hype.”8

Even more modest growth, however, would outpace what is occurring today for many other media platforms. Veronis Suhler Stevenson, a private equity investment firm that publishes an annual “Communications Industry Forecast,” projected the compounded advertising spending growth for 12 different media and communications segments for the years 2004 to 2009. Advertising spending on consumer Internet, which includes advertising on television, newspaper and radio Web sites, was projected to grow 24% between 2004 and 2009, second only to videogame advertising (46%).9

Growth of Advertising Spending
By media platform

Year	Broadcast TV	Cable TV	Total TV	Newspapers	Broad. & Satell. Radio	Yellow Pages	Consumer Mags	Business-to Business Mags	Consumer Internet	Out-of-Home	Movies	Videogame	Total
2000	12.4%	18.6%	13.8%	5.3%	12.3%	8.1%	8.2%	11.1%	75%	8.3%	50.4%	200%	11.6%
2001	-13.6	3.1	-9.5	-8	-7.5	5.4	-10.3	-13.5	-11.8	0	26.8	144.4	-7.8
2002	9.1	3.7	7.6	0	5.7	1.3	-0.9	-10.5	-15.8	0	22.4	100	1.7
2003	-1.1	10.6	2.1	2.1	1	0.9	4	2.6	20.9	5.2	19.9	79.5	2.8
2004	9.1	16.1	11.2	4	2.1	3.7	6	6.3	32.5	6	21.3	51.9	7.6
2005	1.9	14.6	5.7	3.7	2.7	3.7	5.5	7.2	31.2	5.3	19.3	48.3	6.1
2006	7.4	11.9	8.9	4	3.3	4.6	6	7.3	27.1	5.5	16.4	50	7.5
2007	2.1	10.8	5.1	3.3	4.1	4.6	6.3	6.9	24.6	5.7	14.2	50.6	6.2
2008	8.2	10.6	9	3.6	5.9	5	6.5	7	20.3	5.6	12.6	47.8	7.7
2009	2	12.2	5.7	3.1	4.9	5.3	6.7	6.5	17.2	5.4	10.4	34.7	6.3
1999-2004	2.7	10.2	4.7	0.6	2.5	3.8	1.2	-1.3	15.8	3.8	27.7	109.1	3
2004-2009	4.3	12	6.9	3.5	4.2	4.6	6.2	7	24	5.5	14.5	46.1	6.8

Source: Veronis Suhler Stevenson, Communications Industry Forecast 2005-2009, Nineteenth Edition, 2005
Out-of-home advertising includes traditional roadside billboards, as well as non-traditional forms of out-of-home media, such as bus stations and street furniture.

Total ad revenue online is still a fraction of that coming into other media platforms. Online ad spending accounted for less than 4% of all ad spending in 2004 compared with 24% for newspapers, 6% for magazines, 10% for radio, and over 30% for television.10 Yet clearly those percentages are shifting.