Based on insights gained from last Friday's AdRevenue 08 conference in San Francisco, Mahaney suggested that the online ad market is in worse shape than previously imagined.

"October spending in display saw a sharp deceleration from September as advertisers continue to worry about the macro environment," he wrote. "Premium, guaranteed advertising, especially, has been highly impacted across all verticals."

A separate analysis by TechCrunch of online ad revenue of the top four Web companies--Yahoo, Google, AOL and Microsoft--showed only 0.6% growth in the third quarter, down from 12.7% growth in the fourth quarter of 2007.

Citi only last week revised its 2008 Internet ad forecast downward from 16.1% to 11.4%, and its 2009 outlook from 14.1% to 5.8%. Anecdotal information picked up at the AdRevenue conference suggests that estimates could be lowered again in the coming months.

"Several publishers we spoke with indicated that many advertisers have not yet set their '09 budgets, which would have already been set by this time last year for '08," wrote Mahaney. "In addition, one agency informed us that some of their larger clients have preemptively cut their Q4 budgets across the board in anticipation of a severely challenged holiday season."

Display ad pricing is also under increasing pressure, especially from social media sites. According to PubMatic, which runs the AdRevenue conference, effective CPMs (eCPMs) fell 21% on average from the second to the third quarter, with the biggest declines coming at small and medium sites.

Citi expects pricing on premium placements to continue falling while CPMs on targeted niche should continue to rise as advertisers seek out specific audiences at the expense of sites with wider reach.

On the bright side, ad budgets are shifting from traditional media (mainly print and radio) to performance-based display ads, ad exchanges and search advertising. Citi predicts ad exchanges and ad networks to benefit from that trend into next year. Even so, the report noted that publishers complain about too many ad networks claiming to do similar things.

"As such, there appears to be a flight to quality and to vertical ad networks, especially as marketing budgets become constricted in the current macro environment," it stated. With more than 300 ad networks in operation, industry observers are already projecting that the downturn will force the category to contract.

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