Ad Spending Prospects Dim Further

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Online advertising spending, already down substantially in the first half of this year, is expected to decline further after the terrorist attacks on the World Trade Center and Pentagon.


CMRi, the Internet research unit of Competitive Media Reporting, said online ad spending fell 10 percent in the first half of 2001 to $1.5 billion, largely because of slowing economic growth. The research firm said it does not expect ad spending to pick up until after the first quarter of 2002.


"Although we saw a gradual increase for online spending in the last quarter of 2000, the economic environment did not exclude this medium from the drastic hit we've seen across the entire marketplace throughout 2001," David Peeler, Competitive Media Reporting's CEO, said recently.


But that was before Sept. 11. Analysts say the events that day have severely dampened consumer confidence and that they expect negative near-term and medium-term impact on the Internet sector, particularly in ad spending.


"We believe the biggest impact will be on those companies that rely on advertising, which include Yahoo, CNET and, to a lesser extent, AOL [Time Warner]," Arthur Newman, an analyst with ABN Amro, said in a note to clients.


Newman noted that online ad spending has been in the doldrums for the past two quarters and that given the events of Sept. 11, it should stay weak for at least the next few quarters. Ad spending offline, he said, will see an even greater effect.


"[T]he impact of September 11 will be slightly more muted within the online space than in the offline space," he said. "In part this is due to online spending having already been slashed, and, unlike some other media, portals did not pull their ads."


Despite the increased traffic to Web portals during the attack, he said, none of the portals could have created additional revenue from the increased usage.


Yahoo's year-over-year ad revenue fell 28 percent in first-quarter 2001 and 40 percent in the second quarter. Even lower ad revenue for Yahoo is expected as advertisers cancel contracts in the wake of the attacks. Also, continuing weakness in the economy is expected to take its toll on the company's revenue.


Analysts noted the portal has had little success in reducing its dependence on dot-com-related advertisers and expect its ad revenue to decline 48 percent in the third quarter and 44 percent in the fourth quarter.


"We believe the company may see short-term pressure on results as certain advertising programs are canceled or postponed," said Mark Rowan, an analyst with Prudential Securities. "However, we did not expect a significant upturn in [Yahoo's] online advertising revenue until the middle of next year anyway, and therefore, we believe that [Yahoo] stock will not be exposed to significant near-term downward pressure."


Newspaper publisher The New York Times Co. said advertising revenue for its newspaper group declined 17.8 percent in August. It also noted that its September and third-quarter results are expected to be affected by the attacks.


"Right now it's a bit premature to speculate about the next quarter for NYTimes.com," said Christine Mohan, a spokeswoman for The New York Times Co. "However, we do have strong relationships with our clients and are continuing to run campaigns with many of our top-tier advertisers."


CNET Networks, which operates the news.com Web site and technology-related portals, also is not expected to fare well in the coming months.


"CNET is heavily dependent on a rebound in technology spending, and a weakened corporate profit environment could further delay a recovery," Newman said.


He said CNET's revenue fell 26 percent in the first half of the year, and he forecasts a further 37 percent decline in the second half. However, though he previously expected the company to rebound early in first-quarter 2002, he noted that the recent events could delay that rebound.


One company expected to weather the storm is online auction company eBay. Analysts noted eBay has limited exposure to the travel industry - one of the hardest-hit sectors following the attacks - and that though its auction volume dipped slightly immediately afterward, it should recover nicely. On Sept. 18, eBay said it was comfortable with analysts' estimates of $185 million in revenue and earnings per share of 11 cents for the third quarter.


"We believe that eBay's business should hold up very well relative to other Internet consumer service companies," Legg Mason analyst Thomas Underwood said. "In times of volatility in many markets, tremendous liquidity is desired. EBay is in the business of liquidity."


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