• by Ross Fadner , January 16, 2004

Online ad spending in the United States is estimated to have grown 14.5 percent in 2003, indicating that the slump is over and advertisers are ready to open their wallets and start spending freely again, right? Well, sort of, but not exactly, says eMarketer in their cautiously optimistic January 2004 Spotlight report, "Online Ad Spending: More Money, More Choices."

It should come as little surprise that the increase in online spending has occurred largely on the strength of search marketing. The biggest spending hike of the year came during the third quarter at 20.3 percent, but the spending trends indicate that most of the money went toward search and away from display and banner ads.

According to the report, as search engine marketing and contextual marketing are all direct response ad vehicles, it is unlikely that large brand manufacturers will direct more attention to the Internet than they ever did as a vehicle for branding. The report argues that they will keep their hands away from their wallets unless ad vehicles that complement their branding initiatives become more widespread.

Rich media adoption could be the answer. Spending on rich media for the first half of 2003 was up 121.7 percent over the first half of 2002 ($89.3 to $197.5 million). That said, the report still claims that 2003 was a year of spending imbalance, which doesn't bode well for the future of the Internet as a viable branding medium.

But there are still significant reasons to be optimistic for 2004, and the report cites the optimistic spending outlook for several major online companies.

In July, MSN estimated it would take in $832 million in ad revenue during 2003, a 48% increase over 2002. Knight Ridder Digital, one of several companies to post impressive third-quarter ad revenue results over the previous year's third quarter, reached 21.5 million in ad revenue, up 51 percent from 2002. DoubleClick's $5.3 million Q3 ad revenue is a marked improvement over 2002's $61.9 million loss.

Perhaps most significant may be the Online Publishers Association's claim that 26 of its member companies reported ad revenue increases averaging 45.9 percent over last year's third quarter. During the first three quarters of 2003, member ad revenues averaged a 38.2 percent increase over 2002.

One blight on the scorecard, however, is America Online. According to report author David Hallerman, "America Online remains the soft spot of the advertising industry," he says. "The huge company's advertising income in the third quarter of 2003 fell to $178 million, a 33.3 percent plunge from last year's corresponding quarter at $267 million. In addition, AOL said this year's total ad revenues would probably drop by up to 40 percent as ad contracts from the dot-com boom years expire."

Hallerman further notes that if you "take AOL out of the ad spending equation, the overall ad market looks a lot healthier than it does otherwise."

eMarketer projects steady--if conservative--incremental gains during the next several years, expecting U.S. online ad spending to surpass its previous high of $8.1 billion in Q4 2000 by 2005.

Several key factors will contribute to the increase in online ad spending, says eMarketer: the continued growth of keyword search; an increase in traditional advertiser adoption of the Internet for branding purposes; larger rich media ad formats coupled with increased demand (which the report says will drive up rates and increase spending) as a result of high-speed connections reaching critical mass; and two pivotal events in 2004: the election and the Olympics.