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To Hell and Back: The Outlook for Web Advertising Changes Again

Most of the participants in the internet sector are trying to shake off the pain suffered in the year 2000. The euphoria of 1999 ended abruptly about a year ago after the Super Bowl, when the scrutiny applied to dot-com TV ads on the biggest TV event of the year began to extend more deeply to the marketing budgets and business models of the dot-com companies.

Soon after, the financial community took the dot-coms aside to administer some harsh discipline. The result: a high body count (due in part to some excessively suicidal tendencies) and the liquidation of trillions of dollars in shareholder value. Caught among the victims were the key players in the web ad market like Yahoo! and DoubleClick.

Not all the news is bad, though some of it is misleading. For example, AdRelevance reports that online ad impressions in December 2000 increased by 21% over the previous month, reaching an all-time high of 65 billion. Before we drink at the well of such "good" news, let's do a sobriety check.

The basic problem: while measuring impressions is a good indication of growing web traffic, it ignores the price of the impressions. In the final analysis, cash, not traffic, is the life-blood of a successful business or market.

AdZone Interactive reports on web advertising spending in real time. It therefore is one of the most timely sources of information on current trends.

We've pointed out before (see "What is the Real Average CPM of Web Advertising?") the problematic nature of AdZone's use of rate card CPMs (cost per thousand) in calculating ad spending. In fact, we estimate that AdZone's dollar estimates must be reduced by as much as 60% to account for discounting off the rate card. Nonetheless, AdZone is a good source for assessing month-to-month spending on web advertising. What do the latest numbers show?

Month-to-month growth during Q4 2000 was 2%, 1%, and 5%, the lowest growth rates during the year.

Translating this into quarter-to-quarter growth rates, we find that fourth quarter grew by 16%, about half of the average growth over the previous two quarters.

This relative weakness is made even more disturbing by a look at historical quarterly growth rates. As can be seen from the following Internet Advertising Bureau (IAB) data based on the past five years, the fourth quarter is normally the strongest quarter of the year. Last year fell far short of the norm.

To return to the issue of pricing, we again compare AdZone's numbers to those of IAB. AdZone reports that web ad spending in the first two quarters of 2000 amounted to $6.3 billion. IAB's figure for the same period of time is 35 percent less --$4.1 billion. The discrepancy can be used to infer how real CPM pricing compares to the rate card.

But this is a point we've made already. What we'd like to point to now is the change in the inferred erosion of rate card pricing. Using this methodology, we can deduce that pricing degradation doubled from the first quarter to the fourth quarter of 2000. That is, while the average discount off rate cards was 27% in the first quarter, it rose steadily over the next three quarters to 40%, 56% and 62% respectively.

This is how we would explain the seeming contradiction between record impressions and nearly flat dollar growth.

So much for the bad news. What is the good news?Myers Reports introduced a new Ad Confidence Index that indicates far grater optimism on ad spending than has been reported in the media in recent months. Myers survey of marketers and ad agency executives indicated optimism levels are much higher now than they were in 1999 at the height of the media economic boom.

Jack Myers said: "The downturn in the media economy is being caused by predictable and cyclical factors...much of the consternation and fear of a sustained recession in the media industry is the result of overly aggressive and misinformed press reports. We believe the media economy is merely experiencing a cyclical hiccup in what will be a period of sustained economic growth." Myers also projects that internet spending will grow 70% in 2001.

Forrester Research's Jim Nail chimed in: "Online advertising's current swoon won't last." The dot-com tide has begun to ebb -- while dot-coms accounted for 69% of digital marketing in 2000, by 2005, traditional advertisers will embrace it, driving 84% of digital marketing.

The use of the term "digital marketing" highlights the importance of digital marketing in the larger sense, of which advertising is a component. Forrester expects this integrated marketing approach to drive digital marketing growth from $11 billion in 2000 to $63 billion in 2005.

Moreover, Forrrester expects web advertising to continue to account for roughly half of digital marketing. With this solid driver in place, Forrester expects digital marketing to grow nearly six-fold to $63 billion in 2005, and web advertising to grow at the same rate to nearly $31 billion. The good news is that web advertising and web-based marketing will grow strongly in both quality and quantity.

Our advice to the despondent: put down the gun in favor of a stiff drink; let's see how the new year unfolds.


David Halprin, EMarketer.com. February 5, 2001

Copyright © 2001 eMarketer, Inc.. All rights reserved.