Rapid Growth Predicted for Online Advertising

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NEW YORK -- With the dot-com bubble behind it, the Internet advertising industry is poised for sustained growth, new forecasts suggest.


Investment bank U.S. Bancorp Piper Jaffray released its forecast for the industry yesterday, predicting 20 percent compounded growth for the next five years. For 2004, Piper Jaffray expects the online ad industry to grow 21 percent, from $6.7 billion to $8.1 billion. The forecast mirrors a prediction of 20 to 25 percent growth released a day earlier by Smith Barney.


"Online advertising is growing, that's no secret," said Safa Rashtchy, Piper Jaffray's Internet analyst, at the bank's online advertising symposium yesterday.


Direct response advertisers have driven the Internet's recent growth, particularly through the use of paid listings on sites like Google and Yahoo. According to Piper Jaffray, search advertising will stay in demand. The bank raised its estimate for 2003 from $1.9 billion to $2.3 billion. By 2008, it expects U.S. search revenue to reach $5.7 billion.


The interest in search likely will drive up prices. Piper Jaffray estimates click pricing this year of 35 cents to 38 cents. The bank sees that rising above 50 cents and nearing $1, about the price point for leads in yellow pages directories.


"It's often more efficient than any other direct response medium out there," said Jim Warner, president of interactive agency Avenue A/NYC.


One area poised for growth is contextual paid listings, like the type offered by Google and Overture Services. Piper Jaffray expects spending on such pay-for-performance ads to climb from $100 million this year to $1.4 billion in 2008.


Rashtchy said traditional advertisers were starting to spend more online. He cited a list of the top Web advertisers from a year ago and this year, with top advertisers like DaimlerChrysler, Sony and Citigroup now making the list.


On top of that, Rex Briggs, principal of Marketing Evolution, observed that the Internet is one medium that is still growing, as opposed to TV. Yet prices for TV time continue to increase, even as the audience shrinks. Over time this is unsustainable, Briggs said, with more dollars moving from TV to online.


"Profitability always ends up winning the war," he said.


While search continues to star, the bank's forecast calls for a revival of display advertising, which is forecast to decline in 2003 for the second straight year. Piper Jaffray expects display advertising will grow 11 percent in 2004 and reach $8.2 billion in 2008. By then, Rashtchy expects advertisers will devote up to 6 percent of their budgets online versus 2 percent now.


The buoyant forecast follows the Interactive Advertising Bureau's report that online ad revenue in the first half of the year rose 10.5 percent. And the Online Publishers Association reported yesterday that its members saw revenue growth of 46 percent in the third quarter. The OPA includes New York Times Digital, ESPN.com and CBS MarketWatch.


Top publishers such as Yahoo and MSN all reported strong demand for online advertising this year. Even the industry's drag, AOL, which expects ad revenue to decline 40 percent this year, has said that its ad sales have picked up. Rashtchy said publishers have gotten smarter about targeting their ad inventory, while the buying and planning process is easier.


"The industry has done a lot to address the structural issues," he said. "There's still some more work to be done."


Briggs said the biggest structural impediment remained ad agencies, which still are enamored of making TV commercials in exotic locations, often relegating the Internet to an afterthought.


"It tends to make them a bit more biased toward TV advertising than the economics would dictate," he said.


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