December 6, 2006

The latest Internet marketing analyst estimates indicate total U.S. online ad spending of $16.4 billion in 2006, a 30.7 percent gain over 2005's $12.5 billion. The prime engine behind such a strong growth rate is Google. The search giant's U.S. Internet advertising revenues are expected to be about $4.05 billion, after subtracting TAC (traffic acquisition costs) paid to its network partners.

For next year, impressive results are expected, with total U.S. Internet ad spending reaching about $19.5 billion. But at 18.9 percent, the overall growth rate will clearly be more modest than in 2006. This will be due to overall economic weakness, with U.S. real GDP growth expected to fall from over 3 percent this year to around 2 percent in 2007.

However, it is noteworthy that even with a softening economy, growth in online ad spending will still be 17.5 percentage points higher than the average growth rate in total U.S. ad spending, set to inch up by only 1.4 percent next year.

With a similar take on the overall U.S. landscape, Merrill Lynch media analyst Lauren Rich Fine said last week that the investment bank's small 2.6 percent overall ad spending increase for next year isn't surprising, given the more muted economic expectations for 2007.

Steve Fredericks, CEO of TNS Media Intelligence said in early December "we see GDP remaining sluggish at least through the first half of next year."

Overall U.S. real GDP growth rate is likely to be closer to 3 percent in 2008. Internet ad spending will also rebound with a about a 22 percent increase over 2007, to reach a total of $23.8 billion. With political races increasingly dependent on online communications and with the 2008 election expected to be hotly contested, a significant amount of what was a $3.14 billion political advertising market in 2006.

In addition, the 2008 Summer Olympics will also help support an Internet ad-spend uptick.

Earlier this year, more conservative ad spending estimates that including those from eMarketer, put the 2006 total at $15.9 billion were actually altered by Yahoo's relative weakness. This will see the company's ad revenues grow by only 17.5 percent in 2006, compared with a 37.2 percent increase last year.

Furthermore, while Yahoo's anticipated 2006 U.S. ad revenues will account for 17.5 percent of the total U.S. Internet ad market this year, that share is about a two-point drop from 2005's 19.4 percent figure.

Three months ago, eMarketer expected that the Yahoo's revenue wobble would ripple across the entire market. Subsequent data have shown this effect to have been very limited. For example, the Interactive Advertising Bureau and PricewaterhouseCoopers third-quarter figure of nearly $4.2 billion in Internet ad spending represents a gain of about 33 percent over the 3rd quarter of last year.

The implication is that Yahoo's losses have been gains for other sites-- not just Google, but competing portals as well such as AOL, which posted a 46 percent worldwide ad revenue growth in the 3rd quarter, and is expected to increase U.S. Internet ad revenues by approximately 40 percent this year.

Source: eMarketer