Jefferies released its revised estimates and offered additional insights into the online ad market on Wednesday at its 3rd Annual Internet Conference. Jefferies' estimates for the sector, which are among the most bullish, come as eMarketer earlier this week projected that online ad spending will slow to less than 19% this year after three straight years of more than 30% gains. (OMD 2/27)

It's no secret that search is fueling a lot of the growth in online advertising: Jefferies projects it will reach $14 billion for fiscal year 2006, with a 25% compound annual growth rate through 2010. It says search will account for nearly half of all ad dollars spent online.

Display or brand advertising online--including non-search segments such as classifieds and lead generation--will experience a 19% compound annual growth rate through 2010, driven in part by traditional advertisers shifting at least a portion of their ad budgets online, according to the bank.

Attributing its forecast revisions to the fact that the online channel is quickly becoming a mainstream marketing channel with proven return on investment, Jefferies pinpoints the online advertising segment at nearly $30 billion globally and $16 billion in the U.S.

Still, it says online represented just 6% of total ad spending in the U.S. However, that trend will shift as advertiser dollars increasingly migrate online; Jefferies projects that online will represent nearly 10% of total ad spending in the U.S. by 2010.

Search advertising reached nearly $14 billion globally in 2006--and will continue to grow, but at a slower rate of 25% through 2010. Search accounted for 46% of all ad dollars spent online in 2006. Brand or display advertising represented $16 billion in revenues and accounted for 54% of all online ad dollars in 2006; Jefferies projects it will grow at a 20% clip through 2010.

Jefferies also observed the following:

• Pay-for-performance-based advertising models such as paid search, lead generation, and affiliate marketing are growing in popularity and credibility as advertisers begin to process the direct connection to return-on-investment metrics.

• Keyword search advertising is the most popular online ad format, accounting for 40% of revenues, followed by display advertising (21%); classifieds (20%); referrals/lead generation (7%); rich media (6%); sponsorship (4%); and e-mail (2%).

• New ad formats and styles are increasingly blurring the line between branded and search-based advertising. In this regard, Jefferies cites Google's video ads via its AdSense network, which sell on a cost-per-click basis, and MSN's ad sales on Xbox-based video games via its AdCenter service.

• Cost-per-click and CPMs have flattened in the last year due to CPCs on popular keywords reaching levels that make it challenging for merchants to hit their ROI targets, and the increasing emphasis on non-paid algorithmic search and on multiple-word queries that tend to be less expensive since there are fewer advertisers bidding on them.

• The launch of Yahoo's Panama system in early February appears to have revved up keyword bidding on Yahoo as advertisers and search engine marketers jockey for position. For example, an advertiser that might lose a top position--since the algorithm goes from ranking advertisers on bid price only to bid price popularity--may decide to experiment with the new platform and drastically raise the bid price in order to keep a top-tier position.

  For these reasons, Jefferies notes that it's too early to understand the full effects of Panama on CPCs across the Yahoo network and on the industry as a whole.