• by Kate Kaye , June 29, 2004

Industry analysts agree: the online ad business has regained its footing, and this time the ground is solid. Media dollars are moving online, and the Interactive Advertising Bureau last month made it official, reporting that at nearly $2.3 billion, Q1 2004 ad spending topped all quarterly records since the group began tracking revenues in 1996.

In response, acquisition action is picking up. In the past few days alone, significant deals have been signed: marketing and technology firm Agency.com on Tuesday annexed agency Exile on Seventh, and email marketing outfit Return Path netted email company NetCreations, also yesterday. Only a day earlier (June 28), interactive agency holding company aQuantive snared Web site marketing services provider SBI.Razorfish, and America Online last week snapped up online ad network Advertising.com.

AQuantive has been on a busy buying spree--the Seattle-based company made moves in the search and rich media arenas through recent acquisitions of Go Toast and Ad4Ever. DoubleClick purchased Performics and formed a partnership with Macromedia for its DART Motif rich media ad management product. AOL has shown interest in streaming multimedia search by luring Singingfish.

"Companies are trying to position themselves the best they can to take advantage of the growth prospects happening in the space," suggests Wes Selke, Equity Research Associate at investment banking firm William Blair and Company. "One of the main reasons the money is chasing this industry is--this time around a lot of these companies are showing profitability."

Selke believes that private equity and venture capitalist firms are displaying a heightened interest in the online ad industry, citing proof of high ad response rates and the success of innovative online campaigns such as the Adventures of Seinfeld & Superman webisodes for American Express. Despite newfound vim, the memory of gloomier days looms. "Let's face it--the press and financial markets have done a complete 180 on the interactive industry," observes IAB President Greg Stuart. He still can't shake the dismay he experienced the day a Wall Street Journal editorial published during the dark ages declared that online advertising isn't really a business at all.

Stuart concurs with other industry watchers that the spate of acquisitions and uptick in online ad spending indicates that the interactive ad space has finally gained some much-warranted legitimacy. Analysts also agree that the promise of more television dollars moving online is driving online ad market activity. Increasing trepidation about the future of TV advertising, reports of young males neglecting the tube, and the ability to reach the at-work audience via the Web are fueling the movement of media dollars from TV to the Web, they say.

The positive trend is still fresh enough to benefit the prescient among the investor class. "The turnaround in online advertising means there are still [a] lot of companies that are undervalued," comments Forrester Research Analyst Jim Nail, who says he's received several calls in the past few weeks from clients expressing interest in the interactive advertising industry. Nail figures that venture capitalists, burnt once before by overvalued dot-com investments, are gravitating toward the market again, for good reason. After all, VCs have learned not to go near anything that doesn't have a positive cash flow. "Anybody who's survived the last couple of years must have been doing something right," Nail notes.

The race is on among Darwin's fittest, now that the weak have withered away. Many companies are finding that it's smarter to acquire technologies or service operations, rather than take the precious time to develop their own. William Blair and Company's Selke expects agencies to start gobbling rich media technology firms. Forrester's Nail thinks not, arguing: "Very few ad agencies own television production studios." The consensus among analysts and IAB board members, however, is that industry consolidation will continue.

Is there concern that another interactive feeding frenzy could backfire on the industry yet again? "No," answers the IAB's Stuart, noting that increased standards and focus on measurement and research have created a strong foundation on which to build the industry's future. "We can't go back to a world of unfettered silliness," he adds. "It would be kind of like becoming un-pregnant."