• by Mark Walsh  @markfwal, January 19, 2009

Federated Media Publishing has cut staff as part of a strategic shift toward "conversational marketing" at the expense of traditional display ads.

The company--which runs advertising across a network of 150 sites--has laid off seven of its 90 employees, mainly from its display ad department. Announcing the restructuring Friday, Federated Media CEO John Battelle outlined the company's plan to increase its focus on social media-centered campaigns.

"Over the past year, it became increasingly clear that the majority of our business was in the execution of these more complex media programs," he wrote in a post on the company blog. "We are realigning much of our staff to support the marketers and content creators who make these programs sing by expanding our Strategic Programs and Major Accounts teams."

Battelle added that Federated Media would be hiring more developers and publishing talent in line with its new direction.

The move comes in the midst of a pullback in display advertising caused by the recession. Spending in the category fell 5.6% during the first three quarters of 2008 compared to the same period in 2007, according to Nielsen Online.

Display ad prices, meanwhile, have been cut nearly in half in the last year. Average CPMs for image-based ads dropped to 26 cents in the fourth quarter, down from 50 cents a year ago.

Battelle said in his post Friday that Federated Media's marketing and publishing partners are looking for highly engaging yet cost-effective ads to connect with customers during the downturn. An upcoming report by Forrester Research indicates that advertisers plan to boost spending on social media despite the recession.

"Marketers will increase spending in social media during a recession as this cost-effective tool set allows customers to spread the word quickly at low cost," said Jeremiah Owyang, a senior analyst at Forrester. "Secondly, expect an increase in consumer adoption of these tools as people strive to reconnect with former colleagues, polish their personal brands, and get education on new job skills."

EMarketer, however, expects advertising growth on social networking sites to slow to about 10% in 2009 to $1.3 billion after increasing 33% last year to $1.2 billion. In contrast to Forrester, eMarketer believes that experimental ad formats--including those on social networks--will be hard-hit by the recession.

Owyang disputes that social media advertising should be classified as experimental spending. "While social media best practices certainly have not been defined in this new market, some brands have been practicing it for three years now, so it's not truly 'new media' or 'emerging media,'" he said.

Among the high-profile campaigns developed by Federated Media have been a Web-based graffiti contest via Facebook to promote the BMW Series 1 and blogger podcasts sponsored by HP's iPaq 510 smartphone.

Federated is the latest among scores of Internet companies that have reduced staff in response to the economic downturn in recent months. Even Google is feeling the pinch, laying off 100 recruiters last week.