Search Expands Role As Online's Ad Engine

The rate of expansion for online ad spending continued to accelerate during the second quarter, soaring 43 percent over the second quarter of 2003, according to estimates released Monday by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers. The so-called Internet Advertising Revenue Report, which pegs the second quarter's online ad volume at $2.37 billion, compares with a growth rate of nearly 40 percent and a volume of $4.6 billion during the first half of 2004.

Sequentially, online ad spending rose 6 percent over the first quarter of 2004, which the IAB and PWC revised downward to $2.23 billion from an earlier estimate of $2.27 billion.

The report also reveals exactly how much of an engine paid search has been for the online ad business. With nearly $1 billion (947 million) in search ad spending, during the quarter, search accounted for 40 percent of all online ad spending, up from only 29 percent a year earlier.

As a result, conventional display advertising continued to erode in terms of share of online ad spending, declining to 20 percent from 23 percent in the second quarter of 2003.

"The industry has been experimenting with different formats since the beginning, and while search has been the strongest format recently, we think that evolution process will continue," stated Tom Hyland, chair of PWC's New Media Group. "In fact, as broadband begins to reach critical mass in the home we think the number of traditional advertisers with branding objectives will further increase as it provides a better platform for more compelling media ads and video formats."

Despite that prediction, rich media eroded to an 8 percent share of online ad spending during the quarter from 9 percent in the second quarter of 2003.

Online Ad Spending By Format


------Q2 2004------ ------Q2 2003------
Ad Dollars (%/total) Ad Dollars (%/total)
Search $947 million (40%) $481 million (29%)
Display Ads $474 million (20%) $382 million (23%)
Classifieds $403 million (17%) $282 million (17%)
Sponsorships $213 million (9%) $199 million (12%)
Rich Media* $189 million (8%) $149 million (9%)
E-Mail $47 million (2%) $66 million (4%)
Referrals $47 million (2%) $17 million (1%)
Slotting Fees $47 million (2%) $83 million (5%)

Source: Internet Advertising Revenue Report - Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers . In 2004, the "interstitial" format was combined within the "rich media" category. Dollar figures are rounded.
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