Online Advertising and The Competition

Internet advertising revenues continues to rebound from the bubble heyday. In 2000 online ads reached $8BB. Post-bubble, internet advertising took a nose dive as advertisers cut back online spending by more than 50%. With the passing of time and the demonstrated real-time effectiveness of paid search, 2005 is on track to exceed $14BB in online ad spending. However, in spite of these impressive gains, internet advertising continues to be the poor cousin to traditional media (network and cable television tracks at $160BB in ad revenues; print advertising and outdoor represent another $20BB in North America alone).

All of these facts represent positive trends for online advertising. As a result investors continue to be bullish as evidenced by the positive gains in search and online media stocks in Q2. However, given the constraint at the macro level of the total pool of advertising dollars spent annually (not to mention the inevitable cyclical nature of the ad business), online advertising will not enjoy an unfettered run at grabbing ad dollars:

Television is the 900LB gorilla and is not standing still: Television executives understand that the franchise is under attack and are not standing still. Interactive TV --long a pipe dream-- has finally arrived on satellite and cable. DirectTV and Comcast among others are rolling out these services with advertisers like Sony and Daimler Chrysler and are creating one:one conversion relationships for its advertisers-- just like the web. Moreover, technological innovation, such as VNU and Arbitron's Apollo PPM joint program ("portable people meter"), will help broadcast advertisers close the gap on cause and effect between the media we see and the products we buy. Finally, broadcasters, understand that they need to start delivering greater value if they are going to maintain their share of wallet. Just witness ABC's recently closed upfront performance. Based on the strength of their programming (last year's Lost and Desperate HW's were unexpected hits), ABC opted to take a modest 6% gain over last years rates (and close up $600MM in upfront commitments) rather than extend the upfront period in the hopes they could simply negotiate higher rates. ABC has made the bet that it will rely on the strength of its programming (sports and entertainment) and secure premium rates in the future as opposed to trying to sell the farm now.

In Store Digital Signage: With the proliferation of sub-$1000 (and soon sub-$500) flat screen displays connected to satellite or wireline networks, retailers are capturing greater revenue per square foot when digital signage is in place. A recent pilot with Bell Canada demonstrated a 9% lift in products sales where in-store digital signage was present as compared to standard paper signs. Expect marketers to divert ever greater share of ad spending to digital signage promotions as they now have the ability to reach customers during "the decisive moment" of buying.

Mobile Advertising: Much as broadcasters subsidized programming with advertising, carriers are doing the same using promotion dollars to leverage the value of their networks. Branded content, games and more will be paid for not by subscribers, but by advertisers. And with the truly intimate relationship marketers have the potential to create via mobile handsets, it will be an irresistible pull for ad dollars to be dedicated to the mobile market. And, yes, it will all be permission based.

Internal competition: Over time the efficacy of online advertising may well prove to suppress the percentage of ad dollars dedicated to online spending. The internet's unique ability to deliver highly targeted-- and infinitely measurable results (no fuzzy Neilsen or Arbitron ratings to interpret) lets marketers realize their nirvana: measuring actual results for every dollar spent. Television and print have always relied on the luxury of their inherent inefficiency to artificially protect expensive space rates. Online advertising has no such place to hide. Advertisers see exactly what they get, but they will only pay for what they get-- nothing more--- because they won't need to.