• by June 24, 2005

more large companies and popular consumer brands reconsider their massive commitments to TV advertising and other forms of traditional media, it's inevitable that more ad dollars will flow online. Or, that's at least what proponents of digital media and marketing hope.

But it's not just wishful thinking. Advertising industry forecasts are bullish about online ad spending. For example, Merrill Lynch reports that paid search and paid inclusion will reach $5.5 billion in 2005, up from $3.5 billion in 2004. Those two segments represent 45 percent of the total online ad market. Merrill projected that online advertising will hit $12.4 billion this year and more than double to $25 billion by 2009. Goldman Sachs' estimate for 2005 is very close to Merrill's; it projects the sector will hit $12.3 billion. "Top 200 advertisers have transitioned from testing online advertising to making it a permanent component of their marketing mix," the Goldman report states. Forrester Research was more aggressive, forecasting that the online ad sector will reach $14.7 billion this year, for a nearly 23 percent increase over its 2004 estimate. Online market researcher eMarketer projected the overall online ad market will come out to $12.9 billion this year, for a 34 percent increase over its 2004 estimate. And, of course, the Interactive Advertising Bureau/ PricewaterhouseCoopers reports first quarter 2005 online ad spending reached $2.8 billion, for a 26 percent increase over the same period last year. The IAB's tally for 2004? It reported online ad sales of $9.6 billion.

Given those optimistic forecasts, it seems possible and even likely that companies will put more money on the Web to support brands where it makes sense to do so. Those dollars will go into brand/image advertising, new product launches, events, promotions, and sponsorships, and, of course, paid search and paid inclusion.

So far, the estimates for online media remain a drop in the bucket for most companies. "The huge gains are coming off a very small base," says Jon Swallen, senior vice president of research, TNS Media Intelligence. "The clear trend we see is that the Internet is capturing a growing share of the total share of advertising spend." TNS estimated that online represented 5.2 percent of the total measured advertising spend in 2004. That's up from 4.7 percent in 2003 and 4.3 percent in 2002.

Many of the companies that turn up in TNS' list of companies that spend the most on digital media are those that one might say are endemic to the online medium, such as Dell, Microsoft, Hewlett-Packard, Netflix, and Verizon. The No. 2 company on the list, Freeze.com, isn't well-known; it's an online store that sells desktop applets (programs that can be included on an HTML page) and software. Other major companies on the list include General Motors and DaimlerChrysler, both of which have aggressively leveraged online search and used the Web for acquisition and retention efforts, as well as vehicle launches. While TNS declined to provide OMMA a list of the top online spenders by brand, GM's Chevy, Buick, and Jeep brands are known for their heavy use of online media and marketing.

Swallen has observed a 20 percent growth rate for online media over the last two years but he says it will be hard to sustain that kind of growth. He cautions, "It's dangerous to look at any kind of Top 50 list. It's a snapshot in time, and the composition will change." "It wasn't until 2004 that we saw the top spending, blue-chip advertisers shift a larger share of their ad budgets to the Internet. Look at the Top 50 advertisers, which includes a mix of companies as diverse as P&G, General Motors, SBC, Pepsico, L'Oreal, and Home Depot," Swallen notes, adding, "As a group, they spent $47 billion on advertising and represented one-third of total ad volume. They allocated 3.5 percent of their money to the Internet in 2004. But the Internet's share of total industry ad spend was 5.2 percent during this period. So the blue chips still lag the industry average by a considerable amount."

Swallen also says that online ad spending growth is coming from large companies that shifted some dollars to the Web in 2004 but, he adds, "The amount of money that a company allocates to any medium is going to be based on the marketing and media strategies of the brands which that company manufactures and promotes."

For example, P&G's Tide brand is not a big spender on the Web, according to Swallen. There it's about the brand and the degree to which its users can be found online. Expedia is an example of a brand that was born on the Web; the Web is the appropriate medium for the online travel service. Meanwhile, some large brands that are endemic to the Web, such as Yahoo!, have found it necessary to be on TV and in other media to increase their awareness of their brands, services, and features.

Microsoft is No. 3 on the list, with about half of its media spending on the MSN service and the other half supporting software products. Time Warner is in the No. 4 slot, with about one-third of its media dollars promoting America Online and Netscape, two digital brands. Ford Motor Co.'s Lincoln and Volvo divisions are also heavy spenders on digital media. "The automakers are out there prospecting," Swallen notes, which is another way of saying they're using search - a lot.

While TNS doesn't offer forecasts for individual media as a rule, Swallen says he believes the Internet will continue to account for, and grow, its share of total ad spend. That growth will come increasingly from non-endemic advertisers.

"Over the past four years, there's been a real shift in the composition of ad revenue on the Internet," Swallen says, explaining, "Dotcom advertisers accounted for over half of [the] Internet ad spend and traditional advertisers were the remainder. Today, it's closer to a 60/40 split with traditional advertisers being the bigger piece. This sector will continue to account for a growing proportion of total Internet ad revenues, but at the same time, the share of their total multimedia ad budgets that these companies allocate to the Internet will lag that of the dotcom sector. The share gap will narrow, but it won't be eliminiated."

TNS' online spending estimates don't include a key sector - search. TNS' figures for online measured media are drawn from an analysis of 2,500 Web sites and the display advertising on those sites. They don't include keyword search, text ads, or any classified ads that get returned from search queries. Slotting fees and e-mail are not measured. TNS plans to include search in its measured ad spending data next year.