'Net Will See Nothing But Flat CPMs, Analyst Also Says Ad Model Has Failed For Social Nets, Online Video

While online ad spending is projected to continue expanding - albeit at a much more modest rate of growth - the contraction of the general economy is expected to put even greater downward pressure on the price of both online display and search advertising, according to a new 2009 outlook for the Internet industry released Monday by a top Wall Street researcher. That analyst, JP Morgan's Imran Khan, also predicted that advertising models would fail for two of the Web's hottest emerging platforms - online video and social media - and that it would take longer than expected for a substantive mobile advertising marketplace to emerge.

"Although the economic news cycle is largely negative, we believe the longer-term secular trends that are driving the growth of online activity remain quite positive, and we expect these trends to help Internet companies continue growing even as overall economic activity remains sluggish," Khan wrote in the 2009 edition of his annual "Nothing But Net" report. He cited the expansion of broadband penetration as an important catalyst for more robust "commercial Internet activity," and said that would continue to accelerate consumer usage and adoption of the medium in ways that would impact other industries and aspects of the economy - especially the retail industry, which increased broadband usage would correlate to increased ecommerce growth and a corresponding decline in "brick-and-mortar" retail businesses.

Khan predicted that the fourth quarter of 2008 and the first quarter of 2009 would prove to be the toughest financial quarters for the online industry, and that the Internet economy would begin to rebound in the second half of 2009.

The economic pressures, he predicted, would also drive a greater share of online advertising investments toward "performance-based" advertising models and away from traditional "CPM-based" models, and that in turn would contribute to the downward pressure on online CPMs during 2009.

That shift, coupled with contracting display advertising budgets, and an expanding supply of "non-premium inventory pricing" from ad networks, social networks, and other sources, will contribute to flattening CPMs for online display advertising.

"We now think 2009 will be a weak year for graphical advertising publishers, as we expect the graphical ad sector to under-perform performance-based advertising in a down economy," Khan opined, predicting the display ad marketplace would grow about 6% in the U.S., and about 6.7% worldwide in 2009.

While online search ad spending is projected to expand at roughly twice that rate, Khan predicted that general economics would also contribute to lower keyword prices and less revenue per search query for the major search engines in 2009.

In a conference call with investors Monday morning, Khan seemed especially dour on the prospects for two of the hottest online platforms: social networks and online video.

"My personal view is the advertising model will not work" for social networks, Khan said, recommending that social networks need to find revenues sources "beyond advertising."

And while he described the growth of online video usage as "amazing," he said online video advertising has yet to materialize in any significant way due to some fundamental supply and demand issues.

"If you look at the total online video advertising as a percentage of total television advertising, it's slightly over 1%," he said, adding that online video purveyors have "failed to understand" demand from advertisers for the medium, and their reluctance to sponsor popular online video content on platforms such as YouTube. He also said that marketers were locked into important television advertising sales conventions such as audience guarantees and the upfront marketplace that the online video advertising marketplace has yet to replicate.

"I think the Internet industry has to figure that out," he concluded.

While Khan sees mobile as a significant long-term advertising opportunity, he predicted it would not materialize for the near term due to the reluctance of marketers to experiment with an emerging platform during a downward economy.

2 comments about "'Net Will See Nothing But Flat CPMs, Analyst Also Says Ad Model Has Failed For Social Nets, Online Video".
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  1. Craig Calder, January 6, 2009 at 1:23 p.m.

    The current CPM ad model isn't the only challenge facing the online video market but it could be the most critical.

    Agencies and brands need to move away from the current online mass messaging model and focus on improving their ROI through personalization and improved targeting.

    Running a video campaign on CPM and backing out a CPC, CPE, CPA or CPS is bad business. The online video and media industries need to embrace the performance model so both can move on to the next phase and deliver on the promise of true dynamic and effective online advertising.

  2. Peter Jacobson from Mentor Capital Associates, LLC, January 7, 2009 at 1:47 a.m.

    It takes all types to make the world go around. This article reminds me of the naysayers in the early days of the internet, and of the early days of pay-per-word, Google, etc. There is nothing of substance here to make one doubt whether online advertising against video and social networks will be successful in 2-4 years. It is still morning on creation day. Advertisers have always and will continue to follow the crowds, even if their model has to change to fit the locale. Its this locale change that is challenging the behemoths, but the web has unleashed a torrent of smaller, more flexible and dynamic advertisers who have become the bread and butter of the online ad industry. Ergo, its also a decent bet that Myspace et al will find a way to generate ad revenue out of a userbase that almost exceeds the total population of the USA, and where the cost of supporting its business operations is lower than any single TV Network, and where the cost/effort required to expand the userbase to this kind of scale is almost ZERO (due to how viral social networks are).

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