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Search Powers Internet Ad Rebound

Paid search powered the long-awaited revival of the Internet advertising market in the first half of 2003, according to new industry spending figures, making up for declines in other areas of online advertising.

Advertisers spent $3.29 billion online in the first six months of the year, a 10.5 percent increase from the same period a year ago, according to an industry spending report prepared by PricewaterhouseCoopers for the Interactive Advertising Bureau. Online ad revenue grew for the third straight quarter, rising 1.7 percent from the first quarter to $1.66 billion. The spending was a 14 percent rise from second-quarter 2002.

Paid search rose to $957 million in the first half of the year from $240 million a year earlier. Its percentage of overall online ad spending rose from 8 percent in the first six months of 2002 to 29 percent in 2003. Spending on classified ads also rose, growing 24 percent to $561 million in the first half of the year.

The strength of search was evidenced in the shift in pricing models. Though CPM or impression-based deals remained the most common form, accounting for 45 percent of revenue, performance-based pricing rose from 15 percent of revenue to 33 percent. The growth came at the expense of hybrid pricing deals, the IAB said.

“Direct marketers are the ones who lead entry into a new medium,” said Greg Stuart, head of the IAB. “When the direct marketers go and spend money in a new medium, the brand guys follow.”

Paid search's explosive growth made up for a sharp decline in display ads and sponsorship, according to the IAB report. Revenue from display ads, which include regular banner ads, fell 30 percent from $990 million in the first half of 2002 to $760 million this year. Likewise, sponsorship revenue fell from $720 million in 2002 to less than $400 million in 2003.

“I still see us working through long-term deals,” Stuart said.

AOL continues to skew online ad reports. Despite signs that the Internet service is turning around its online ad business, AOL reported that Internet ad revenue dropped 48 percent in the second quarter versus a year earlier, as the company lost $140 million in long-term ad deals. In the first quarter, AOL's online ad revenue dipped 42 percent.

“The industry still isn't back in tip-top shape, but it's a lot healthier than it was a year or two ago,” said Nate Elliott, an analyst with Jupiter Research.

The rise in spending on search overshadowed other gains. Rich media spending more than doubled to $198 million in the first half of 2003, the IAB said. E-mail revenue rose 10 percent to $132 million.

The IAB's breakdown of ad spending has its critics. The report mixes purchasing methods, such as sponsorships and slotting fees, with ad vehicles, such as display advertising and rich media. It does not define any of the terms in its report.

“That method does end up undercounting some true online ad vehicles such as rich media,” said David Hallerman, an analyst with Internet research firm eMarketer.

The IAB online ad revenue report follows signs that the industry has rebounded from its long decline. A parade of positive earnings news has come from the likes of Yahoo and online news publishers, all reporting strong demand for online advertising.

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