• by Laurie Sullivan  @lauriesullivan, November 10, 2008

Although the slowdown threatening to drag out two quarters or more has hit the online ad industry, search could remain the bright spot in an otherwise dismal scenario. That's the take from analysts who believe the faltering economy and volatile stock market will make brands pull back ad spending.

Time Warner reported last week that AOL's revenue declined by 17%, or $207 million, to $1 billion due to a 26% drop in subscription revenue and 6% decline in online ad revenue--although rivals steering brands toward search saw gains in the third quarter. Google reported a 28% increase in online ad revenue; Microsoft, 15%; and Yahoo, 1.2%.

Advertising at AOL declined at a more rapid pace than UBS equity research analyst Michael Morris expected, driven primarily by weakness in display advertising. Morris isn't optimistic that the trends will reverse in the near future, given both a weakening environment and eroding CPMs. "I expect advertising revenue at AOL to decline in display advertising and in third-party networks, though the underlying organic growth will continue," he said.

Sanford Bernstein analyst Jeffrey Lindsay wrote in a research note that IAC/InterActiveCorp's Ask.com continues to perform well, with search queries up 30% year-over-year in the third quarter and U.S. market share increasing from 3.3% earlier this year to 3.7% as of September.

There are, however, some signs of slowing. IAC/InterActiveCorp's CFO told analysts during an earnings call that Ask.com has begun to see weakness in cost-per-clicks (CPCs) and conversion rates for paid search advertising. It prompted Lindsay to reduce paid search revenue estimates to $191 million in the fourth quarter. Overall, it could mean a 6% decline in Media & Advertising revenues in 2009, compared to 2008.

Domestic ad spending tends to link closely with gross domestic product (GDP) trends, analysts said. Lately, the Internet has been one of the areas to gain share from advertisers, but when an economy falls into recession, GDP forecast flat-lines or declines for a couple of quarters and brands cut spending, the potential to see gains isn't great, said James C. Goss, media and entertainment analyst, Barrington Research Associates, Chicago.

Economic hardships have led consumers to use search engines more as they evaluate shopping options and compare prices. "It's interesting that Google's search-based advertising is done in a plain-vanilla way," Goss said. "On one hand, you have Ask.com that tries to be more colorful to track attention. On the other, there's Google. The ads blend in, so you don't notice them."

Indeed, online advertising has advanced to Flash and full-motion video, but Google continues to offer brands the most basic form of advertising with the greatest success, Goss said. It has become apparent that shifting advertising business to the Internet is not the magic solution. "Advertising typically seems like a good place to cut because no one notices the negative impact until later on," Goss said. "The economy needs to improve for advertising to flow better. Right now, we're just thinking about how to hold our own."

Analysts believe that brands will stay closer to customers by focusing on search campaigns, Web sites and social network strategies. People looking for jobs will rely on social networks Facebook and LinkedIn, as well as search engines Ask, Google, MSN and Yahoo.