In 1Q09, Brace for First U.S. Online Ad Spend Decline After Dot Com Bubble

by Karsten Weide, IDC

The U.S. Internet advertising industry will most likely experience the first actual contraction in ad spending in the current quarter ever since the dot com bubble burst in 2001. This is what the results in our Worldwide and U.S. Internet Ad Spend Report 4Q08 (forthcoming) suggests. Our quarterly report models worldwide and regional ad spending trends, and monitors the U.S. market in detail.

The latest numbers are not pretty. While worldwide Internet ad spend continued to grow, if at a muted pace, fourth quarter U.S. Internet advertising sales have been much worse than anticipated. Growth was essentially flat year-on-year: Total U.S. advertising spending increased by just 0.4% to $7.13 billion from $7.10 billion in the same quarter a year ago.

Search ads still grew at 10% year on year in 4Q, barely keeping Internet advertising at large afloat. But display ads declined by 7% in the past quarter, largely because brand marketers were compelled to save such a lot of advertising money that they also had to pull back on display ads even if they didn't want to. And classified ads were affected even worse and declined by 18%, largely because houses, jobs and cars are not traded as actively in the current situation, and because of the continuing weak performance of eBay, the major company in this segment.

All of this does not bode well for the current first quarter. U.S. online ad spending may very well experience a decline in 1Q09, and perhaps also in 2Q09. This suggests that the low double-digit growth rates that most industry forecasts assume for 2009 (including IDC's 10% growth forecast) are too optimistic. (Stay tuned for IDC's next ad forecast in late March.)

The reason for this gloomy prediction is the following: Even in the last quarter, search growth was only barely able to offset losses in display and classifieds. And in the current quarter, while search ad revenue growth will not collapse, it will slow and display and classified ads will most likely show worse negative change rates in 1Q09 than in 4Q08. All in all, we believe U.S. Internet advertising revenue could contract by as much as 5% in 1Q09. And things may get worse in the second quarter.

We believe that the contraction will wane mid 2009, and that the industry will slowly recover from there. Yet, even in decline, online advertising will do better than the economy at large. The current consensus amongst economists is that the recession will end this year, and with it, online advertising will hit its stride again. This winter shall pass, too.

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