Online ad revenues to surge

Three recently released reports on US online advertising spending -- one looking back and two looking to the future -- all have the resounding theme of massive growth.

Wednesday, the Internet Advertising Bureau (IAB) released its report on record-breaking first-quarter online advertising expenditures, while Jupiter Communications released its online ad spending projections for the industry. Forrester Research released its own 20-page opus on the industry last week.

Jupiter projects ad spending to be $11.5bn (£7.1bn) by 2003, while Forrester projects $22bn in 2004, from $2.8bn in 1999. Based on an ongoing study by PriceWaterhouseCoopers, the IAB reported that first-quarter online advertising spending hit $693m, nearly doubling the $351m recorded in the first quarter of 1998.

Rich LeFurgy, president of the IAB, credited new hybrid pricing models and more e-commerce advertisers on the Web as the reason for a strong quarter, saying he expects the year to well exceed last year's $2.8bn expenditure rate. "Industry revenues continue to rise, due in no small part to the maturation of the way in which all segments of the business are working together to improve the online experience for users," said Tom Hyland, chairman of PriceWaterhouseCoopers New Media Group, which conducted the IAB study.

The IAB report concluded that the top 10 publishers received 75 percent of the ad revenue in the first quarter, up from 71 percent in the fourth quarter of 1998. The top 25 notched up from 86 percent to 88 percent, while the top 50 Web publishers landed 93 percent of the advertising, up from 92 percent in the fourth quarter of 1998.

Forrester's report predicts that within five years, Internet advertising will represent 8 percent of the advertising pie, up from less than 1 percent last year, exceeding magazine, yellow pages, radio and outdoor spending. The rapid growth will result from exponentially expanding Internet use, e-commerce and portal popularity, all of which significantly influence advertising expenditures.

While the Web is a winner with expanding ad revenues for dozens of publishers, the growth is causing erosion in other mediums, particularly print media and direct-response marketing, according to the Forrester and Jupiter reports.

While many marketers do not see a decrease in advertising with traditional media, those who do plan cuts will slash an average of 10 percent from advertising in print, particularly with classifieds, and 5 to 6 percent of advertising in broadcast, according to the Forrester report.

Jupiter also highlights online classifieds as an area of revenue erosion for print. Online classifieds are expected to grow from 1 percent of all classifieds in 1998 to 6.4 percent by 2003; but because of the proliferation of free and discounted classifieds, the take will only be $1.4bn in 2003.

The US newspaper industry's revenue for classifieds is now almost $16bn. Newspapers stand to lose $3.2bn, or 13 percent, of the market by 2003, according to the report. "The main reason for slippage is the Internet is a branding and direct-response medium. It allows marketers to take advantage of both branding and the direct-response aspects of the Internet," said Charlene Li, senior analyst at Forrester, and the main author of the report. "Those advertising dollars are taken from other media and put into the Internet."

Li cited First USA credit card spending to reach $500m with America Online for marketing over the next five years. The marketing budget is money that would have been spent on traditional media, she said.

The media, financial services and automotive sectors will account for nearly half ($4.2bn) of all online ad spending in 2003, according to the Jupiter report. The IAB report revealed that consumer-related advertising led the pack with 27 percent of the spending pie in the first quarter, while financial services (21 percent), computing (20 percent), retail/mail order (13 percent) and new media (8 percent) followed.

Banner ads continue to be the predominate type of advertising, at 58 percent, with sponsorships (29 percent), interstitials (6 percent), email (1 percent), with all others at 6 percent.

Impression-based deals, or CPMs (cost per thousand) stood at 43 percent and performance-based deals at 6 percent of revenues in Q1, according to the IAB. Forrester predicts a 50-50 split between impression and performance deals by 2003, signalling a shift away from the much-decried CPM model by advertisers wanting sales leads or sales revenues to show for their advertising dollars.