Commentary

Analysts Take Closer Look At Online Advertising

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A flurry of analyst reports released Wednesday point to increased online advertising in 2011. The insight comes from stronger homepage and mobile ads that gained momentum and produced better results. These ads seem to forge a tighter connection between consumers and brands. Technology will drive the transition.

Lazard Capital Markets Analyst Colin Sebastian forecasts a "continued resurgence" in digital advertising, driven by stable macro-economic conditions, consumer spending and an expanding mobile market. He estimates the overall online ad market will rise between 15% and 20%, highlighting companies like ValueClick, GSI Commerce, Akamai, TechTarget, and BitAuto.

Sebastian also makes an interesting comment in the report, writing that "science trumps art in the next stage of display" advertising, with "ongoing innovation in behavioral targeting and re-targeting, as technology and automation move in" to support more sophisticated consumers and online advertising market.

Google will dominate in search, mobile and display, but, they will, to a lesser extent, also be driven by the combined force of Yahoo and Bing. Search should also benefit disproportionately from the growth of mobile Internet usage. During the holidays, third-party data suggests paid search remained healthy with CPCs increasing more than 10% in all key categories such as retail, according to Sebastian

Yahoo sold its log-in page 71% of days during the second half of the fourth quarter in 2010, but had the lowest proportion of custom homepage ads among the four sites Macquarie Research Analyst Ben Schachter analyzed, according to the report published Wednesday. The ads rose to 36%, up from 32% in the first half of the fourth quarter and 12% in the third quarter. The report tracks homepage ads by company, vertical and objective.

Expect Yahoo to slightly beat street expectations for the fourth quarter when the company reports earnings and full-year end, Dec. 31, on Tuesday, Jan. 25, according to Gene Munster, senior research analyst at Piper Jaffray. "While Facebook is a concern and will compete for dollar share in display, we believe Facebook does not currently offer, or have plans to offer, the richer ad focused experiences Yahoo does," he wrote. "For the current quarter, we remain comfortable with our estimates 1% ahead of the Street and remain buyers of YHOO.

YouTube also did well in the fourth quarter, continuing to see momentum on its homepage takeovers and display ads, according to Schachter. "While Media advertisers comprised 46% of the total in 2H 4Q'10, this actually shows YouTube is diversifying its customer base, as it was 56% in 1H 4Q'10 and 65% in 3Q." Describing the ad unit as a "Tandem Masthead," Schachter writes that 21% of advertisers during the same period developed a custom integration ad with a smaller box unit slightly lower on the homepage.

Did the positive quarter push YouTube into profitability? Trip Chowdhry, managing director at Global Equities Research, believes Google hit profitability for YouTube during the holiday quarter, and expects both YouTube and Google Mobile to contribute to a "revenue and earnings surprise" the next time the Mountain View, Calif., company reports. Convinced the company has done so well, Chowdhry raised estimates, reiterating an over-weight rating and a 12-18 month price target of $700.

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