2005 Annual Report - Online Economics

One variable that could change the economic potential of the Web is technological. Ever-faster broadband technology may change the way consumers respond to Web advertising, and more video on the Web may change the way ads are presented, in part, by making the Web more like television. When we looked to see if there was growth in high-speed connections as of the first quarter of 2004, there were 17.3 million high-speed Internet customers, up from 12.8 million in the same quarter of 2003.⁴³ Furthermore, July 2004 Nielsen/Net Ratings showed that U.S. broadband penetration was now over half (51%) the American online population. That is up from 38% in July 2003.⁴⁴

In addition, Yahoo, Google and AOL are reported to be racing to introduce video searching that would facilitate consumption of video on demand and probably further boost broadband penetration as well as rich-media advertising.⁴⁵

Broadband not only provides online users with faster service, it also allows advertisers to use more sophisticated rich media and streaming video to promote their products. Data from Double Click, a New York-based organization that distributes online ads, shows that the number of rich ads - a combination of animation, video and sound with interactive features -served by the company grew 54% in the first quarter of 2004 from the same period a year earlier.⁴⁶ Yet for the first three quarters of 2004, DoubleClick said, rich ads remained stagnant as a percentage of all ads distributed.⁴⁷

Broadband vs. Narrowband Penetration

Design Your Own Chart

Source: Nielsen/NetRatings, July 2004

Broadband connections include ISDN, cable modems, and DSL; narrowband connections include modem speeds from 14.4K through 56K.

Some are skeptical about the future of broadband growth in the U.S. While the growth in broadband penetration is significant and the country has made great strides in ensuring broadband access among rural and low-income populations, the U.S. is ranked only eleventh in the world in broadband penetration.⁴⁸ Furthermore, the addition of 1.7 million broadband subscribers in the second quarter of 2004 was less than the number added in any quarter in the previous year, according to Leichtman Research Group, Inc.⁴⁹ Could this suggest that the explosive broadband growth in the U.S. has peaked? The bigger problem for broadband adoption in the medium term is that the number of dial-up subscribers has been fairly stagnant for the last three years and the overall Internet population isn't growing much any more.

In the end, going into 2005, online economics is improving. Increased portions of the advertising pie, growth in revenues and profits and plans for further investments suggest that companies and advertisers remain intrigued by the possibilities of the new medium. Nonetheless, revenues are still small comparatively, and the online industry will need to prove its competitive value on Wall Street.