November 17, 2006

A Slowdown in Online Advertising?

% Growth Quarter- to-Quarter
Q104 3.9
Q204 6
Q304 2.4
Q404 13
Q105 4.3
Q205 6.6
Q305 4.7
Q405 17
Q106 6
Q206 5.5
Q306 2

Revenues from online advertising continued their robust growth in the third quarter of this year, according to new numbers released this week. But some experts say there are now signs worth watching as to whether that extraordinary rate of expansion will continue.

Overall, advertising revenues in the third quarter came in at $4.2 billion, an increase of 33% over the $3.1 billion in the third quarter of 2005, according to data from the Interactive Advertising Bureau. And total ad revenue for the full 12 months is forecasted to surpass last year’s total of $12.5 billion, which at the time was the largest amount since the industry began collecting data. By year’s end, online advertising could reach $16 billion.

But to reach that $16 billion mark will take a big fourth quarter. Indeed, there is some hint of a possible cooling off here. The third quarter ad revenues in 2006 showed just a two percent increase over the second quarter. In contrast, third quarter 2005 revenues grew by almost five percent over the second quarter numbers that year.

There is plenty of reason to think the fourth quarter and the Holiday season will be big. Historically, fourth quarter growth has been the strongest each year. In 2005, for example, growth in the fourth quarter was 17% higher than the third quarter. And in 2004, there was a 13% hike. Indeed, some industry analysts are bullish that this year’s fourth quarter revenues will be as robust as previous years, if not higher. Moreover, they dismiss the modest growth last quarter as merely a seasonal adjustment.

But other experts are not so optimistic. eMarketer, for instance, initially projected $16.7 billion for the year but then cut it to $15.9 billion in late September, a downward revision of five percent.

There are a number of theories about why things might slow. First, there is concern that the national economy itself may be slowing down, and data from the Department of Commerce shows the economy grew just 1.6% last quarter. What’s more, according to the National Retail Federations, holiday gains are expected to be “subdued” this year.

Then there is the 800-lb gorilla in the room, Yahoo, which accounts for an online ad market share of roughly 18%. In the third quarter, Yahoo’s ad revenues were strong but considerably down from growth in previous years, and the company stated in a letter to shareholders it was “not satisfied” with its recent performance.

Whether or not the resiliency that the online ad industry has shown for much of this decade will continue has huge implications for the news industry, which increasingly regards its future as a digital one.