US online adspend: new records set as net breaks $5 bn a quarter

05/10/2007

Strategy & Analysis | by Danny Meadows-Klue
The latest numbers for the US from PricewaterhouseCoopers (PwC) and the IAB confirm that the world’s largest online ad market is still enjoying the largest annual growth in real terms. Spend surged ahead by 25.4%, crossing the $5 bn mark in a single quarter.

US Internet advertising revenues for the first six months of 2007 were nearly $10 billion, setting yet another new record and were almost 27 percent up on the first half of 2006. Spend reached nearly $5.1 bn in the second quarter of 2007.

US IAB President Randall Rothenberg noted that the results "are really no surprise”, and went on to suggest that because "more and more marketers have embraced the reality that interactive is the fulcrum on which their brand strategies need to be based”, he expects “robust growth to continue."

The growth was propelled not just by search engines (which increased their share of online adspend to 41%) but also by the wider consumer advertising sector. Classifieds continued to swell, but they did lose share within online to the Rich Media and Video formats which now account for 8% of all online advertising.

The 2007 US online ad market
First six-month revenue data breakouts
($ millions)

Source: IAB US, PricewaterhouseCoopers 2007

Topline growth hides turmoil

Overall the US ad market is faring well, but as in the UK this disguises the dramatic churn and channel switching between media that has made it the most turbulent and unpleasant of times for many media owners. The US press classified sector continues to suffer the agonising pain of the CraigsList free-to-air model, the rise of the Google pay-per-click leads generation model has cut deep, and EBay has replaced the garage sale market.

As in Europe, the pay for results classified engines such as Oodle will encroach further into the yields (if not the volumes) of US regional and local press, while dis-intermediation is effectively letting even small advertisers deal direct. As IP-based geo-targeting grows, barriers that have prevented small business advertising moving to the web will melt away, strengthening the traditional and mobile web platforms at the expense of press. The small business engines within Ebay will rise in strength even further, placing Amazon and Ebay in exactly the same space in the US domestic market.

The nature of the inescapable Google effect is broadening. Whether the DoubleClick acquisition is approved by competition authorities or not, it’s only natural that Google will expand in to the display advertising market and its reach will allow for the delivery of audiences with comparable or greater volumes than a TV network buy. This will encroach on a relatively untouched TV advertising sector, just as IP TV dollars start to shift. Television has been on increasingly shaky ground for ten years in the US; the challenges of media fragmentation were initially added to by media clutter (which is why so many Americans simply can’t recall the adverts in the breaks they just watched), and then the Tivo generation learned how to retake control of their media – screening out commercials altogether.

Many consumer brands we spoke to are now talking frankly about switching campaign budgets to the web as TV’s audience reach stumbles but, worse, perceived ad effectiveness falls even faster. Media fragmentation, marketing savvy audiences, and massive changes in consumer behaviour are all impacting faster in the US than most countries and it’s all much faster than most classic media groups can hope to adapt. This paves the way for polarisation in both corporate profits and digital audiences. As Digital has been predicting since 2003, when the shake-out comes it will be larger and more brutal than most classic media (or their shareholders predict).

Where next?
Digital Strategy’s forecast for the full year is remains at $22.5bn, with the growth continuing, but at a gently softening rate. More brutal is the switch in non-advertising spend as investments in the web presence of firms, the relationships with web retailers and the role of email relationship management all continue to swell dramatically, albeit under the radar of the official figures because they remain untracked.

The explosive growth of social media is being effectively monetised as media owners harness both behavioural and contextual ad technologies to trigger a step-change in the profitability of consumer generated content. Google’s opening up of YouTube to carry display advertising is just the start of a much deeper trend for the commercialisation of social media, and for those content owners who choose not to let ads build into their pages there will readily be an ‘ad free’ opt out payment. Unlike the choice given to internet users for surfing with ads switched off, many content owners will readily shell out a few hundred dollars for the privilege, inviting parts of ‘the long tail’ into the heart of the new massive networks.

What’s particularly interesting is the way search is holding its own, dominating all other formats and becoming a US media channel in its own right. As Google spills onto the mobile handset in the US in 2008, another wave of search advertising supply will open up. At Digital, we’re still bullish about the market and see no sign of slowdown in the switch to search from classic customer acquisition channels, or the switch to online in business to business marketing.

In the US, 2008 will be the year when TV advertising starts to move to the web, fuelled by an opening up in the avenues for television content to, legally, reach US audiences. Smarter rights agreements and technical advances in the architecture for IPTV delivered content will see the US start to catch up with where some of the European markets already have reached. The big difference will be the massive economy of scale that this instantly creates to advertisers, changing the nature of the television landscape within a surprisingly short period of time.

For mobile advertising we still see 2009 as the year the industry reaches its tipping point, although wider mobile marketing (SMS and mobile related digital outdoor advertising) will continue to enjoy a massive wave of growth across the second half of 2007 and all of 2008.

What should I do? Key takeouts

Advertisers: Question whether your strategic media mix reflects where your audiences place their attention. Question whether the integrated marketing models you run are designed for today or 2003. Invest in talent, training and retention of digital staff. Learn about the strategic models that can integrate your media and heavily invest in data analysts to learn exactly what works and how: put the science into marketing and create a culture of optimisation of the results.

Media owners: If not already in place, invest fast in building a digital strategy that helps protect your brand franchise. Focus investment on building sustainable product rather than protecting short term ad revenue. Train teams at every level, and invest in talent.

Offline agencies: Find strong digital partners and build integrated plans to protect your client relationships and continue delivering value. It’s too late for many to migrate to digital and hire the teams needed, so by focussing on partnerships there’s a way of protecting client relationships.

Digital agencies: Invest in talent, training and staff retention. Build strategic models for media that can work across thousands of campaigns, and focus on analytics as a way of learning exactly what works and how: put the science into marketing and optimise the results.

Investors: Continue to follow audiences and product development rather than short term profits or revenues. Review portfolios against the Web 2.0 criteria and scrutinise evidence to look for sustainable success. Continue to anticipate the impact of disruptive technologies and shocks to the supply chain, and assume that the ad models of CPM and CPC will melt into smarter currencies in the medium term. Pay particular attention to markets that will be pressured by wiki and search models.

For information about developing resilient digital strategies, or training your team to thrive and succeed in the rapidly changing digital sector, just ask Digital’s team.

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Comments (1)

Analyst: Danny Meadows-Klue:


NEED PERSPECTIVES FROM DIFFERENT MARKETS?
Thinking about the issues all this raises, here are a few comparisons about market growth and online adspend. They’re from articles or papers where I’ve tried to contextualise what is really happening (most recent first)…

US boom just keeps on coming
http://www.digitalstrategyconsulting.com/articles/2007/10/us_online_adspend_new_records.html

UK spend shows the transition between media
http://www.digitalstrategyconsulting.com/insight/2007/10/uk_digital_advertising_market.html

Mexico starts late but accelerates fast
http://www.digitalstrategyconsulting.com/articles/2007/07/mexico_hits_the_internet_tippi.html

Switzerland lags behind where it could be:
http://www.digitalstrategyconsulting.com/articles/2007/09/sizing_the_gap_swiss_marketers.html

Central & Eastern Europe rising quickly
http://www.digitalstrategyconsulting.com/insight/2007/05/digital_central_and_eastern.html

Spanish internet use and spend starts to accelerate
http://www.digitalstrategyconsulting.com/insight/2007/04/spain_understanding_the_online.html

Denmark: always out in front
http://www.digitalstrategyconsulting.com/articles/2005/01/danish_awards_put_internet_in.html

Some horridly wrong predictions in 2005 about where the market might be heading
http://www.digitalstrategyconsulting.com/insight/2005/04/digital_advertising_futures_th.html

The first attempt to track European online adspend for 2005
http://www.digitalstrategyconsulting.com/insight/2006/02/digital_europe_tracking_the.html

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