• by Mark Walsh  @markfwal, October 7, 2008

Facing a souring economy, U.S. Internet ad revenue grew 15.2% during the first half of 2008 to $11.5 billion compared to the year-earlier period, according to a new report by the Interactive Advertising Bureau and PricewaterhouseCoopers.

The second quarter of 2008 was up 12.8% from a year ago--but growth was essentially flat from the first to second quarter this year, suggesting that the weakening economy is taking a toll on Internet spending.

Search advertising showed the biggest gains during the first half of 2008, jumping 24% to almost $5.1 billion as marketers increasingly turn to performance-based marketing as an efficient media buy in the midst of growing economic uncertainty. Display advertising--including banners, rich media and digital video--increased 19% to $3.8 billion.

Despite the downturn, "we believe the fundamentals for growth in this sector remain strong," said David Silverman, a partner in the entertainment, media and communications practice at PricewaterhouseCoopers, during a webinar Tuesday on the IAB report that also included presentations by Nielsen Online and comScore.

Since the fourth quarter of 2007, however, online ad dollars have slipped from $5.9 billion to $5.7 billion, after mostly climbing on an upward trajectory since the third quarter of 2002. Silverman attributed the flattening out over the last two quarters more to the maturation of the Internet economy than the current downturn.

Although he declined to speculate on spending in the second half of the year, Silverman said historical data suggest that Internet ad revenue was on track to hit $23 billion this year. In the last several years, a slightly higher proportion of online ad dollars have come in the latter half of the year. But the latest IAB report noted that "economic slowdown pressure may decrease the annual run-rate in the second half."

The 15.2% increase during the first half of 2008 is not far below the 17.4% ($24.9 billion) that eMarketer projects for the full year. But the market research firm has already revised its estimate downward twice this year from 27%, and could do so again.

Search continued to be the dominant online ad format--accounting for 44% of revenues, followed by display at 33%, classifieds at 14%, and lead generation at 7%. Performance-based spending increased slightly to make up 52% of the first-half total spend, while CPM-based buying dipped slightly to 44%.

Among industries, retail was the largest online ad category at 21% or $2.4 billion during the first half of 2008, followed by financial services at 13% ($1.5 billion); computing and automotive, both at 12% (1.3 billion and 1.4 billion, respectively); telecom at 9% ($799 million); media at 5% ($600 million); and consumer packaged goods (CPG) and food products, at 4% ($421 million).

Last month, Nielsen Online released first-half 2008 data that showed that a 27% drop in financial services spending from a year ago had pulled down Web display ad spending overall by 6%. That trend is likely to worsen in the second half of 2008 because of the financial crisis that has already forced several prominent banks and lending institutions to shut down, merge or file for bankruptcy.

Jon Gibbs, vice president for media analytics at Nielsen, however, pointed out that categories such as CPG and automotive continued to demonstrate steady growth, indicating that these industries were moving beyond experimental spending on the Web.

And while spending on other media formats is flat or declining compared to a year ago, Nielsen estimates that online ad dollars overall increased 13% in the first half of 2008. Enjoying the biggest increases in ad spending are kids and family-oriented sites as well as comparison-shopping sites, at close to 30% gains.

Discussing online retail in the first half of 2008, comScore Chairman and co-founder Gian Fulgoni said consumer concerns about pricing and inflation had led to slower growth during the period, at 12%. With inflation in June hitting its highest point in 27 years, "it's a very challenging spending environment for consumers in total," he said.

Among the categories that continue to show resilience are video games and game consoles, as well as big-ticket items including furniture, appliances and home and garden products.