Encouraging signs include immediate hopes of better-than-expected ad sales at bellwether Yahoo, stable advertising volume and rates across the Web, and slight increases in next year's online marketing budgets from big spenders such as Microsoft and Oracle.
Internet ad sales hit $1.79 billion in the third quarter, down 4.1 percent from the second quarter. But Internet analysts said they were encouraged because the decline had slowed.
"We're on the bottom couple of stairs," said Salomon Smith Barney analyst Lanny Baker. "We've probably seen the bottom, but we're going to get intimately acquainted with it over the next six months."
A recovery is far from assured, but even a glimmer of improvement would be welcomed by companies from publishers of niche content sites to online media giants such as AOL Time Warner and Microsoft's MSN. The Internet sector has been wracked by layoffs, bankruptcies, consolidation and outright failures since the ad market dried up following its go-go days a couple of years ago.
An improvement would also coincide with aggressive steps by publishers to court advertisers by supplementing simple banners with larger, more intrusive ads.
Many analysts pin hopes for an online recovery to the overall ad market, which forecasters expect to remain flat until the fourth quarter of 2002. But analysts say Net advertising could improve more quickly than other media as traditional marketers gain confidence in the medium and allot it larger portions of their budgets in 2002.
Ad buyers added that companies are beginning to set budgets, clearing some of the air of uncertainty that had hung over the sector.
Charles Pinkerton, senior vice president at Martin Interactive, said clients have just begun sending him their budgets--some three months later than usual.
"It looked grim six weeks ago, but we're seeing slightly more for next year--up nearly 5 percent to 10 percent from last year," said Pinkerton, whose agency plans and places online ads for such clients as Coca-Cola, UPS and CareerBuilder.
The Internet claims only 2 percent to 3 percent of advertising budgets, so even a slight increase in spending could mean tens of millions of dollars in extra revenues for Web publishers. Any gains will be particularly valuable for the Web's busiest sites, as three quarters of all ad spending in the third quarter went to the top 10 media companies, according to industry trade group the Interactive Advertising Bureau.
"If overall advertising is flat, online will be up because it's still a small part of the budgets," said U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, who predicted a fourth-quarter windfall for Yahoo last week--driving up the stock 11 percent Thursday.
Although hard evidence of a rebound is elusive, Rashtchy said he's been encouraged by widespread talk of a recovery. Web publishers he's spoken with say they are signing bigger deals with major advertisers.
"While no one is rushing to spend more on advertising, the advertisers are also a little nervous about how much they have cut their budgets and if they will lose market share should an economic recovery start next year," Rashtchy said. He added that if the recession lasts all of 2002, the declines are likely to resume and continue at least until the latter part of that year.
Numbers suggest recovery
Although much of the current optimism is based on anecdotal evidence, some analysts say harder numbers also tell a story of recovery.
Salomon's Baker, for example, said he is encouraged by an analysis of revenue estimates from the leading "Internet friendly" advertisers--retailers, financial services firms, entertainment and media groups, and computing and technology companies. In September, the top advertisers cut earnings estimates by 16 percent. In October, earnings were revised down another 9 percent. But in November, cuts were only about 2 percent to 3 percent.
"If revenues are coming down, demand isn't there. And if demand isn't there, then folks in the marketing department aren't going to promote on a string," Baker said. "If we see earnings estimates start to stabilize, then you've hit bottom. But we need to see a couple of months of upward earnings estimate revisions to begin to gain conviction that the ad market will be heating up."
Some industry executives question the market's short-term health as one its biggest spenders, financial services firm NextCard, struggles with its own finances and has drastically cut online ad spending. According to Jupiter Media Metrix, the company was the top advertiser among financial services companies in January 2001. In November, it didn't register in the top 10.
NextCard has had to curtail its spending because of financial uncertainty, according to a company representative.
But analysts say that other marketers may fill the gaps.
Microsoft, for example, is maintaining its 2002 ad buying budgets. Although the software maker does not specify how much it spends online, it says it believes in the Internet to build its own brand and others.
Meanwhile, the software giant has been trying to fuel a sector recovery and take on rival AOL Time Warner. For the first time last week, Microsoft co-founder and Chairman Bill Gates courted a group of European ad executives from Coca-Cola and General Motors, among others, promoting Internet marketing on MSN. In recent months, Microsoft has signed major marketing partnerships with Volvo and Vivendi Universal.
For Volvo, MSN built a virtual showroom for the launch of its new upcoming sport-utility vehicle, which customers can preorder through the online service. Similarly, MSN developed specialized games on its Games channel to promote Vivendi Universal's remake of the Dr. Seuss classic "How the Grinch Stole Christmas."
Through such partnerships, MSN marketing and ad sales are rising despite the sour economy. Sales are "exceeding our expectations," said Christine Andrews, product manager for MSN. "We're very excited that a number of our companies are taking a majority of online budgets to MSN."
Among the last of the dot-com big spenders to make a splash in TV and print campaigns, jobs site Monster.com said last week it plans to maintain its budget for 2002, with emphasis on Net advertising.
"The economy is not going to be struggling forever. This is a time to spend, not pull back," Peter Blacklow, Monster.com senior vice president for marketing, said in an interview with AdAge.
Despite the sunny outlook, media directors maintain that the first two quarters of 2002 will be a challenge.
"It's dangerous to apply broad-stroke definitions to what's going to happen in the next 12 months," said Adam Gerber, media director for Young & Rubicam's Digital Edge unit, who added that fourth-quarter sales have steadied.
"It's going to be client by client, publisher by publisher and category and category, with pluses and minuses in each area across the board. But the net effect will be a positive rebound in second half of 2002."
Reuters contributed to this report.