For Now, Search Dominates Online Ad Growth

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NEW YORK -- Search marketing continues to drive growth in online advertising, but brand-oriented advertisers will lead the industry's next phase of expansion, according to industry analysts.


The Interactive Advertising Bureau yesterday released Internet ad sales figures covering the first half of 2004. The report, compiled by accounting firm PricewaterhouseCoopers, shows that search spending skyrocketed to $947 million in the second quarter, up 97 percent from a year earlier.


Internet ad spending in the quarter rose to $2.4 billion, 43 percent higher than the year-ago period. For the first half of 2004, Web ad spending is up 40 percent to $4.6 billion.


Search spending rose from 29 percent of overall online ad spending in second-quarter 2003 to 40 percent in the most recent quarter. The increased search spending represented two-thirds of the overall online ad spending growth in the quarter.


"The Internet, so far, has been used as a utility," said Safa Rashtchy, an investment analyst with U.S. Bancorp Piper Jaffray, at the IAB/MediaPost Interactive Advertising World conference.


Performance-based deals increased from 35 percent of online ad spending in second-quarter 2003 to 39 percent in second-quarter 2004. Cost-per-thousand pricing deals dropped from 45 percent to 44 percent. Hybrid pricing made up the rest.


However, the search industry now shows signs of maturing, with Jupiter Research recently forecasting that the paid listings' growth rate will decline markedly to grow at an average annual rate of 15 percent over the next five years.


Jeetil Patel, an equities analyst with Deutsche Bank, said online advertising receives less than 2 percent of the ad budgets of the top 100 advertisers. For online advertising to grow from its current 3 percent of ad spending to exceed 10 percent, it must capture more spending from these brand advertisers, he said.


"It's more of a five-, 10-year phenomenon," he said.


Piper Jaffray research indicates that 75 percent of Internet use is of a "utility" nature as users turn to the Internet mostly to find information.


"At this stage, we're still fairly limited in the forms of Internet advertising," Rashtchy said.


Rashtchy predicts that in 10 years Internet users will spend an equal amount of time consuming online content and finding information.


He expects brand advertisers, who traditionally enjoy larger budgets, will be drawn to the Internet as new forms of online advertising take hold -- like ESPN.com's Motion video service and Unicast's Video Commercial -- and more advertising is sold in integrated packages across different media.


"This is what will really increase the advertising spending," he said.


Advertisers are spending more on branding vehicles, such as intrusive rich media ads. The IAB spending report found ad sales for rich media rose 27 percent in the second quarter to $189 million. The report also found display ad spending increased 24 percent versus a year earlier, reaching $474 million.


"Budgets are starting to grow, and that gives people confidence to try new things," said Geoff Ramsey, CEO of eMarketer, a New York research firm.


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