• by September 20, 2004

The outlook for online advertising in 2005 appears fairly robust--but exactly how robust varies according to who you talk to. Forecasts vary widely, ranging from a high of 33 percent from Deutsche Bank Securities to a low of 10 percent from Merrill Lynch. The 2005 forecast from eMarketer, an aggregator of market research data on the online segment, pegs growth at 25.2 percent. The Interactive Advertising Bureau/PricewaterhouseCoopers estimates that online ad spending will reach $9.1 billion by year-end 2004. On Monday, the Internet Advertising Revenue Report issued by the IAB/PwC found that for the first half of the year, online ad spending was up 39.7 percent versus 29 percent from 2003.

Geoff Ramsey, eMarketer CEO, said he expects to see double-digit growth increases for the next few years. "Part of the reason the Internet is growing is because budgets are opening up a bit--though maybe not as much as agencies and publishers would like--and the Internet is in a growth engine of its own," Ramsey told Interactive Advertising World attendees.

"The tipping point goes by vertical business," said Jeetil Patel, senior analyst, Deutsche Bank Securities. Patel expects spending toward online media to increase in the consumer packaged goods, retail, and pharmaceutical categories. However, he qualified this fact by underscoring that the growthcomes off a low rate of spending.

Patel says that while Internet media represents 14 percent of consumers' media consumption, it remains at just 3 percent of most marketers' budgets. He says that online media consumption by teens is a trend to watch. According to eMarketer, 40 million households will have broadband by 2005--and these constitute 35 percent of all homes in America. DB estimates that 50 percent of all homes will have broadband by 2007.

So, with broadband driving people to spend more time on the Internet, and enjoy more tasks and entertainment online, when will broadband video advertising take off? "Advertisers are waiting for the audience to get there--it's a little bit like the chicken and the egg," Ramsey says.

The IAB/PwC report also reveals just how much paid search has driven the online ad business. Search ad spending accounted for nearly $1 billion ($947 million) of the total online ad revenues for the second quarter, or 40 percent of all online ad spending--up from only 29 percent a year earlier. To show how far and how fast search has grown, Ramsey compared these figures to the slightly more than $900 million that the search category racked up for all of 2002; that's nearly $1 billion for the first half of 2004 versus 2002's $900 million.

Still, the white-hot segment is perceived to have reached a plateau where growth is beginning to slow. The search market is projected to grow at a rate of 40 percent for 2004 to $3.6 billion, or 40 percent of all online ad dollars. Safa Rashtchy, managing director and senior Internet analyst at Piper Jaffray & Co., projects that the search market will reach $7 billion by 2007.

At the IAW breakout panel on the search segment, eMarketer's Ramsey reported that the average person does 30-35 searches per month. "We will continue to see growth, but at a decelerated rate," he said.

Rob Middleton, chief strategy officer at Fathom Online, a search engine marketing and optimization firm, says search growth is dependent upon consumers searching the Web: "We can't force more consumers to search," he said, adding: "In terms of pure search, there may be a cap [on growth]." Both Ramsey and Middleton said growth in local search is only just beginning. "Twenty-five percent of all searches have a local element to them," Middleton said.