Boom in Online Ads this Year Even More than Expected

Spending on Internet advertising in 2005 will grow even faster than previously believed, a market research firm said, although it also predicted a slowdown in growth rates starting next year.

EMarketer cited the booming first-quarter earnings results for the likes of Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO) as reason to revise its already robust forecast even higher.

EMarketer now says that online ad sales will grow to US$12.9 billion this year, a 34 percent increase over 2004 levels. The firm had previously forecast growth of 21 percent from last year, with total spending remaining below $10 billion for this year.

Interactive Advertising

The same forecast predicts that growth rates will begin to taper off next year, though still expand at a double-digit rate, with ad spend growing 21 percent in 2006, 14 percent in 2007 and tapering to just 10.4 percent in 2009.

Interactive Advertising Bureau CEO Greg Stuart said the numbers show that "interactive advertising has clearly become a mainstream medium and one that can no longer be ignored as a critical piece of any marketing mix."

Other market analysis firms have suggested that marketers are still not taking full advantage of the Web. Forrester Research analyst Charlene Li told the E-Commerce Times that a gap remains between how much time consumers spend online and how much of their marketing budgets most companies dedicate to the medium.

"A lot of companies are still building up what they do online," Li said.

Part of the lag has been the relatively limited range of choices for marketers, with banner ads and other display ads augmented first by text ads such as those peddled by Google's search product and more recently the advent of rich media ads. "The menu of choices is growing and spending will follow," Li said. Still, a raft of evidence has emerged showing increasing advertising spending on the Web, with search companies, media companies and portals all attempting new products and techniques to attract the new spending.

Yahoo saw its first-quarter profit nearly double, while the more nascent Google saw its net income grow six-fold during the first three months of the year. Both cited the strength of paid search and other emerging advertising opportunities for their strong performances.

EMarketer senior analyst David Hallerman said early returns from the likes of Google and Yahoo showed that previous forecasts were "a little too conservative about the Web-search advertising those companies have popularized."

The revised forecast builds in an astonishing 40 percent growth rate for paid search, with that market, which is dominated by Yahoo and Google, growing to $5.4 billion in 2005.

Other increases will come as more advertisers dole out for rich-media ads, knowing the Web audience is increasingly viewing sites on high-speed connections.

Rising Tide

PricewaterhouseCoopers analyst Tom Hyland said that the fact that the so-called tipping point of broadband adoption has now passed, with more than half of all American Internet users now accessing the Web with high-speed connections either at home or work, will bring about significant changes to Web advertising.

"Broadband will continue to evolve the face of interactive advertising as more compelling media ads and video formats are created," Hyland said in the eMarketer report. "More and more, brand marketers will look to interactive as an integral platform to deliver rich experiences for brand building and enhancement."

Web companies have recognized that opportunity, with Yahoo unveiling its upgraded and expanded video search product today, a service analysts say is a natural place for video-style ads to be positioned.

The research firm said e-mail marketing revenue dropped slightly in 2004 compared to the year before, but is likely to recover. Otherwise, nearly all formats, including search, classified-style ads and display advertising, notched growth in 2004 and will again this year.