• by Ross Fadner , April 21, 2004

Helped by the red-hot search segment, Internet ad revenue rose 21 percent in 2003 to $7.3 billion, according to the Interactive Advertising Bureau (IAB)/PricewaterhouseCoopers (PwC) Interactive Advertising Revenue Report--surpassing most projections, which were in the $6.6 billion to $6.9 billion range, and marking the first year-over-year annual increase since 2000.

Ad revenue for the fourth quarter of 2003 totaled $2.2 billion--a 38 percent jump over the same period in 2002--marking the highest quarter total since PwC and the IAB began tracking these numbers in 1996.

In addition, PwC adjusted its 2000 and 2001 revenue data due to "restatements reported in public filings by several individual companies." These restatements totaled $138 million in 2000, and $77 million in 2001. Revenue figures for those years have been readjusted to $8.087 billion and $7.134 billion, respectively.

IAB President and CEO Greg Stuart says those numbers don't take into account the federal Securities and Exchange Commission investigation into an alleged $400 million ad deal between America Online and Bertelsmann Media Worldwide. A recent report in the Washington Post newspaper suggested that the deal may eventually mean a restatement in annual Internet advertising revenue figures.

Not surprisingly, keyword search led growth in 2003, accounting for more than a third--or $2.6 billion--of the industry total for the year. Classified ad revenue totaled 17 percent of 2003 revenues, while rich media jumped from 5 percent of 2002's revenues to 8 percent of 2003's totals. Display advertising fell to 21 percent of revenues, from 29 percent in 2002.

Brand advertisers were responsible for 37 percent of online ad spending in 2003, up from 32 percent in 2002. The computing category accounted for 20 percent, and financial services was 12 percent. Retail accounted for 41 percent of consumer brands' spending, automotive came in at 21 percent, and travel stood at 17 percent.

Pete Petrusky, director, new media, PriceWaterhouseCoopers LLP, and author of the report, highlighted the healthy growth of consumer brand spending online. "The increased strength in consumer spending categories relative to other sectors underscores the acceptance of online advertising by traditional advertisers and consumers alike," Petrusky said in a statement.

One of the biggest indicators of overall industry health was the increase in the number of cash deals versus barter and trade deals, according to Denise Garcia, principal analyst, GartnerG2. Cash deals accounted for 96 percent of 2003 revenues--up from 90 percent in 2002.

"I like that we saw less barter and trade this year, which means that a lot more cash is changing hands," said Garcia. "It's not just fake money," she said, adding: "The [2000 and 2001] restatements underscore the fact that this year's figures are backed by real money, indicating a healthy market, which is fantastic."

Riley McDonough, vice president, advertising sales, ESPN.com, agreed that the report showed industry stability. "This is a clear indication that the strong advertising growth that the industry is experiencing is solid and sustainable, and that major marketers have recognized the critical role that the Internet can play in helping them reach their marketing objectives," he said.

McDonough said rich media should see continued growth in 2004. "We anticipate that the expansion of rich media opportunities, particularly in the form of video advertising, to be a powerful driver of our growth over the next year," he said.

The IAB's Stuart concurred, adding that more and more national advertisers are beginning to look to rich media as their online platform for branding initiatives. "At least," he said, "that's what I'm hearing from publishers."

However, Stuart and Garcia both noted that it was search that really drove the market into maturity, and it will continue to do so in 2004. "Search growth won't fall off anytime soon," said Stuart, who added that "search is the leading indicator of the health of the market. It doesn't get any better for a direct marketing channel."

Garcia pointed out that search will benefit from increased use by smaller businesses that will appreciate the performance aspect of it. Traditional advertisers, she says, are for the most part already using the medium. Growth will come from smaller businesses and local advertisers.

Garcia, noting the dropoff in email marketing revenue for 2003, said that email will perform better next year as marketers shake off the effects of spam and adapt to the federal Can-Spam law. Advertisers will likely seek more sponsorships as an alternative to pop-ups and mass emails in 2004. Look to see more sponsorships in email newsletters in particular, she said.

Regarding the report's reflection on overall industry health, Garcia said: "So much has been said about 2004 growth that I expected 2003 to close relatively low over '02 and have '04 be the really strong growth year. This was really good news," she added. "I think [2004] will be a bright year for Internet advertising."

Garcia said that Gartner projects 2004 online ad revenue growth to fall somewhere between 10 and 20 percent--which, she noted, is even better news coming off a strong year. Similarly, eMarketer projects 2004 U.S. online ad revenue at $8.3 billion, a 14.2% jump over 2003.