Online Ad Spend Slated for First Dip Since 2001

After years of steady increases in online advertising, analysts are adjusting their forecasts to show the first real decrease since the dot-com bust.
A new forecast from research group IDC is projecting that in the first quarter of 2009, online ad spending will see its first real decline since the dotcom implosion in 2001.

After running the numbers for the fourth quarter of last year, IDC analyst Karsten Weide found that the estimates of his own firm and many others were overly optimistic. He's now expecting online ad spending to drop as much as 5 percent this quarter.

"The latest numbers are not pretty," Weide wrote. "While worldwide Internet ad spend continued to grow, if at a muted pace, fourth-quarter U.S. Internet advertising sales have been much worse than anticipated."

He warned that things could get even worse in the second quarter, though he remains optimistic that the sector will begin to come back to life by the end of the year.

Cautiously Optimistic

"The current consensus amongst economists is that the recession will end this year, and with it, online advertising will hit its stride again," he said. "This winter shall pass, too."

Online advertising has long been the beneficiary of what financial types call a secular shift, referring to the economic ripple from a fundamental change in people's habits. As people have come to spend more and more time online, advertisers have shifted their spending accordingly.

So while the growth rate of online advertising has been trending down as the recession has deepened, total spending has still been increasing by a year-over-year basis. By contrast, in more mature sectors — particularly print advertising — real declines are common in steep economic downturns.

Online retail has experienced a similar phenomenon. With e-commerce steadily marching into the mainstream, the sector has enjoyed much steeper growth rates than the offline channel over the past several years.

But in the fourth quarter of 2008, e-commerce spending declined 3 percent from the previous year, according to online metrics firm comScore. That's a steep comedown from the growth rates of around 20 percent retailers enjoyed throughout 2007.

The Top Performer: Paid Search

Within the online ad market, not all sectors have fared equally. Paid search has been the best performer, offsetting sharp drops in display and classified spending.

In the fourth quarter, IDC reported that search spending increased 10 percent year-over-year, compared to a 7 percent dip in display and an 18 percent drop in classifieds.

All told, spending growth was just slightly better than flat for the quarter, up a modest 0.4 percent to $7.13 billion, compared to $7.10 billion in 2007.

"All of this does not bode well for the current first quarter," Weide said.

IDC, which had previously projected 10 percent growth in ad spending for all of 2009, plans to release its revised forecast in March.

This article by Kenneth Corbin appears courtesy of InternetNews.com.

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