The slowing economy is starting to hurt an unexpected segment of the advertising world: the Web, which has been growing fast for half a decade.
Once thought to be immune from cutbacks, online advertising -- especially at Web portals and information sites such as those run by newspapers -- is experiencing a slowdown as marketers tighten their belts and make tough decisions about where to spend their leaner budgets. A host of those companies recently reported slowing growth that’s expected to linger through 2008.
Complaining about an online-ad slowdown is like griping about a slugger who is on pace for 40 home runs after hitting 50 last year, said David Hallerman, an analyst with EMarketer Inc. His firm expects spending on such ads to grow to $25.9 billion this year, from $21.1 billion last year, and hit $30 billion in 2009.
Online advertising is “not going to grow as much as expected, but it’s still going to be growing more than other media,” Hallerman said.
Some types will be hit harder than others. Although search-engine advertising, which constituted 41% of all online ad revenue last year, should remain strong, analysts say, marketers are likely to cut back on banners and other flashy display ads.
“Advertisers have pulled back in a pretty meaningful way, and display is feeling the brunt of it,” said Clay Moran, a Stanford Group analyst who recently wrote a research report called “Online Advertising: caution required.”
In recent weeks:
* Yahoo Inc. Chief Executive Jerry Yang told analysts that demand for display advertising was “softening.”
* Online publisher Tech Target Inc. lowered its third-quarter forecast, blaming “macroeconomic weakness in the U.S. and its impact on advertising spending.”
* Lending site Bankrate Inc. cut its 2008 guidance. CEO Thomas Evans explained that the company had “continued to experience softness in display advertising from several of our largest financial advertisers.”
* Ad network ValueClick Inc., based in Westlake Village, blamed the economy for a slowdown in display advertising, which led to a 6% drop in its second-quarter profit.
Analysts say companies tend to cut back first on display advertising, which generated 21% of online ad revenue in 2007, because they see it as a way to improve their image rather than generate direct sales as search ads do.
In addition, Web viewers have become accustomed to the display ads splashed across the top or side of a page and don’t click on them as much as they did in the early days of the Internet, said Ken Deutsch, media director at Long Beach ad agency Grupo Gallegos.
As an alternative, companies are creating websites for their brands and trying to draw viewers through games, funny videos and prize giveaways. The development may be good for Web surfers, but it doesn’t help Web publishers.
“The old model of advertising -- you create something and buy the space to put it in -- just isn’t working,” said Fredrik Carlstrom, CEO of Great Works America, a digital agency.
Clients are now asking his firm to engage the audience rather than just flash an ad in their faces, he said, especially with the increased importance of spending every dollar wisely.
In addition to portals such as Yahoo, Microsoft Corp.'s MSN and Time Warner Inc.'s AOL, which charge premiums for ads on their home pages, newspaper sites are also being hit by the slump in display ads.
In one ominous example, Lee Enterprises Inc., which owns 54 newspapers including the St. Louis Post-Dispatch, said in its most recent earnings report that its online ad revenue had dropped 9.1% while print ad revenue fell 10.1%.
Mike Darrow, the executive vice president of sales and development at Edmunds.com, said advertisers were moving away from display advertising on the car site. Instead, he said, they’re looking toward “integrated contextually relevant positions” -- for example, pages that let consumers browse for sedans will have three vehicles “spotlighted,” with a small label defining them as “sponsored content.”
Edmunds Inc. is vulnerable to an online ad slowdown because car companies have been hard hit in this economy. The company expects 10% growth in advertising revenue this year, compared with past growth of 20% to 30%, Darrow said.
Websites that offer special advertising opportunities aren’t expected to keep up with those featuring search ads. That means Google Inc., which dominates the search advertising landscape, is in better shape than just about any other ad-dependent company out there. Its second-quarter sales grew 38%.
“During periods of slow economic growth, the last thing an advertiser wants to cut is spending on search-based advertising,” Hal Varian, Google’s chief economist, told analysts.