2005 Annual Report - Online Economics

After stunning growth in online advertising during the dot-com boom, the bubble burst in late 2000 and early 2001, then staged a strong and apparently stable recovery. Total Web advertising ended 2003 at just under $7.3 billion, according to figures from Interactive Advertising Bureau.¹ And in 2004 that growth appeared to continue.

How much Web advertising would ultimately increase in 2004 - the totals were not complete when this report was finished - varied depending on the source, but nearly all forecasters predicted growth, and most of them healthy growth. Internet Week, a Web site that focuses on the business and technology of the Internet, gathered growth projections for online advertising for 2004 from 14 different market research firms and found that they ranged from as small as 3.2% to as high as 30%. It is difficult to determine why the range would be so great, but the notable finding is that they all predict growth.²

Projected Online Advertising Revenue Growth, 2004

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Source: Internet Week, August 13, 2004

*Data is based on projections made by 14 different research companies.

Early totals for 2004 suggest that the high-end projections may closer to the mark. One measuring source, Interactive Advertising Bureau and Pricewaterhouse, found that in the third quarter of 2004, Internet advertising revenue increased 35% over the same quarter in 2003.³

Even with the growth, online advertising still has a long way to go. A full year at that second-quarter rate would put annual online revenue at around $10 billion. Broadcast television collected $42 billion in 2003, newspapers $52 billion, and cable $16 billion.⁴ In all, online ad spending amounted to just 4% of overall ad expenditures for all media in 2003.⁵

That projected $10 billion, however, has grown from nowhere in barely over a decade, and the projected growth rate outpaces most other media. Jupiter Research's estimate, for instance, that online advertising would grow 27% in 2004 to $8.4 billion, far exceeds projected growth in other media.⁶

As a further sign of economic health, a study sponsored by Advertising.com shows that "online media continues to have the greatest ad budget expansion plans among marketers, with more than half planning to boost spending in the medium in both 2004 and 2005."⁷ The boost for 2005 is expected to be smaller than for 2004, perhaps partly due to 2004's being a so-called quadrennial year with extra market activity from the Olympics and presidential elections. Still, the online media constitute the only industry for which a majority of marketing executives say they plan to increase spending.

Percent of Marketing Executives Who Expect to Increase Ad Spending

Projections for 2004 and 2005

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Source: Millward Brown data as reported in Media Post, September 2004

There are no data to suggest that an online site's parent company is the force behind ad spending growth, but media companies have begun making use of their cross-media offerings nonetheless. General Electric's NBC, for example, now pitches an ad package that will include exposure of a company's product not only on NBC's network programming but also on MSNBC.com. According to Mary Paris, director of business development and cross-media sales for MSNBC.com, the number of cross-media packages increased 10% during the 2004 upfront compared to the previous year.⁸

And all sites are not created equal when it comes to ad spending. Newspapers sites, for example, averaged $17.70 of revenue per print unit of circulation in 2003, a 22% increase. Among Web sites of papers with over 200,000 circulation, though, the average revenue was much higher, $27.10 per unit, a 33% increase.⁹