Is the Future of Online Advertising in Danger?

In the current economic situation all forms of marketing have suffered a serious blow. The latest numbers suggest that while all marketing media has suffered under the strain of a recessed economy, online advertising growth in particular is softening.

Since the tech and dotcom busts of the 90′s online ad revenue has grown at a staggering pace. The decline of the housing and credit markets, however, has finally spilled over into all sectors. According to the most recent numbers published by the Interactive Advertising Bureau and PricewaterhouseCoopers, online advertising was sliced by 50%. With growth now at 10.6% it is evident that online ad sales have hit a plateau of $23.4 billion. Q4 sales reached $6.1 billion, showing only a small gain of 2.6%

This is the smallest fourth-quarter gain in seven years. The stunted expansion was caused primarily by bleak holiday retail sales and the strained budgets of the biggest advertisers. 51% of ad dollars were spent in the fourth-quarter season, and this is also the smallest percentage for Q4 sales since 2002.

It is clear that the economy has an immediate impact on ad sales; however, David Silverman of PricewaterCoopers suggested during a recent webinar that the growth of the online ad market, despite the softening economic situation, indicates the strength of online advertising as a viable marketing strategy.

This comes as a hard pill to swallow for investors who have seen 25% gains in recent years, thanks to advances in Web 2.0 that fueled a massive expansion in online ad revenue slip down to single digits.

In 2008, experts predicted the numbers of online advertising sales to remain static, however the more current estimates predict a decline for 2009. A slow, steady decline is expected this year. Dr. Kedrosky, an economist at the Global Hollywood Conference, warned about declines of nearly 10%, as traditional sources of ad sales go into a similar downward spiral.

Some more optimistic sources, such as Jeff Lanctot of Razorfish, say that a static 2009 would be the goal to strive toward, and many analysts have not given up hopes of small growth in the sector. Still, with the depressing numbers from the IAB, many research firms and analysts, like eMarketer, are lowering their expectations for 2009.

Some online advertisers have begun looking for more quantifiable sources of revenue. Search went up 4% in 2008, and performance based advertising grew 6%. This is a shift towards ad sources with more accountable revenue. Analysts expect this trend to continue throughout 2009, and expect this area to grow until the economy firms enough to encourage more entrepreneurial sources of online advertising again.

Display advertising has seen a large slump in sales since 2008, yet it still remains a firm 33% of online spending. Digital video advertising went from 1% to 3%, showing a dramatic increase, despite contributing such a small portion to online ad sales. As video compression techniques improve this area is expected to continue to see growth.

As newspapers continue to face extreme economic strain, classified advertising dropped a hefty $100 million, or about 2% from previous totals. From the industrial sectors the largest contributor, retail, had the biggest losses. Retail ad sales fell from 25% to 22% of spending dollars.

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