Online Ads: Where the Money Really Is

by Jonathan Berr | October 15, 2012 11:05 am

Yes, it’s true that spending growth for online advertising is slowing[1] and that new ways of selling space may reduce the amount of money media companies can charge. But the declines are more a sign of the law of large numbers than anything else. The biggest challenge for companies such as Facebook (NYSE:FB[2]), Yahoo (NASDAQ:YHOO[3]), AOL (NYSE:AOL[4]) and the nation’s newspaper publishers such as Gannett () is to figure out how to sell more than just ads.

According to a report by Borrell Asssociates, a research firm that tracks local online media, the bigger slice of the pie for publishers may be in marketing services such as search engine optimization promotions and developing online ad campaigns, a $390 billion market.

“The average U.S. business spends $17,000 on online services, compared with $6,800 on online advertising,” according to a report released by Borrell. “Thousands of companies are rushing in. They include local media companies, ad agencies, Internet pureplays, and companies that have traditionally provided software, printing or credit to local small and medium-size businesses (SMBs).”

Many companies have already made forays into this market, the potential of which may not be adequately reflected in their stock price.

Facebook recently released what it calls a “marketing bible”[5] that would enable advertisers to use the social network’s analytics to create more targeted advertising campaigns. Yahoo formed an alliance with[6] Media.Net to enable advertisers to “create and customize ad units” across the Yahoo! Bing Network. AOL offers AdTech[7], a service that helps advertisers manage their campaigns across formats. Gannett’s Marketing Services[8] develops what it calls customized marketing campaigns.

The Internet Advertising Bureau[9] (IAB) estimated that online marketing spending grew 147% in the first half of 2000, at the zenith of the dotcom bubble. The data for this year showed a 14% increase. While that’s one heck of a slowdown, there is an import distinction: The 2000 figure was $4.01 billion, and in 2012 it was $17.03 billion.

For Facebook and traditional media companies, the area with the biggest potential for growth is mobile, which accounts for less than 2% of all advertising, according to Clark Frederickson of E-Marketer. It could be a $12 billion market by 2016. “Right now, there are very few companies who are making money from mobile advertising,” he said. “There is a big opportunity there.”

Traditional banner ads are on the decline. During the last quarter, Yahoo reported a 1% increase in display advertising[10], excluding traffic acquisition costs, and AOL’s gain during the same time was 2%[11]. Online video ads and other types of promotions are expected to grow at a much faster rate.

“The days of dumb banner ads are pretty much over,” said Gordon Borrell, CEO of Borrell Associates, in an interview. “The click-through rates are abysmal.”

Ad sales may be changing, but they’re still important. Marketers, though, want more bang for their buck and will do business with the companies that can give them the most value.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

Endnotes:
  1. online advertising is slowing: http://adage.com/article/digital/forrester-reduces-forecast-online-ad-spending/237647/
  2. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  3. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  4. AOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOL
  5. a “marketing bible”: http://www.ibtimes.com/facebook-details-new-ad-strategy-new-bible-798927
  6. formed an alliance with: http://pressroom.yahoo.net/pr/ycorp/239104.aspx
  7. AdTech: http://adtech.com/Home
  8. Marketing Services: http://www.gannett.com/section/MARKETING&template=cover
  9. Internet Advertising Bureau: http://www.iab.net/about_the_iab/recent_press_releases/press_release_archive/press_release/pr-101112
  10. increase in display advertising: http://investor.yahoo.net/results.cfm
  11. the same time was 2%: http://ir.aol.com/phoenix.zhtml?c=147895&p=irol-newsArticle&ID=1718095&highlight=

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