Online Advertising Growing Fast, Might Soon Pass Magazine Ads

BY DOUG TSURUOKA

INVESTOR'S BUSINESS DAILY

The U.S. ad industry could cross a big river this year if spending on online ads overtakes print magazine ads for the first time.

"This is the year the Internet catches up with spending on magazine ads," said Greg Stuart, president of the Interactive Advertising Bureau.

Not everyone is so bullish. Outlays for online ads make up 5%-7% of all spending in the $140 billion to $150 billion U.S. ad market. Magazine ads account for about 15%.

So online ads would have to more than double from 2004 levels to overtake magazine ad spending.

TNS Media Intelligence's February advertising forecast projects Net ads will grow 11.5% this year, outpacing all other fields, but far less than what IAB's Stuart sees.

Stuart concedes hiccups may delay the event for a year or so, but says, "All signs are positive."

The IAB, a big online ad trade group, says U.S. spending on Internet ads hit a record $2.7 billion in the fourth quarter of 2004, a 24% jump over the same quarter a year earlier. Full-year 2004 spending on Net ads surged 32% to nearly $9.6 billion.

Stuart sees signs that 2005 might be a "breakaway" year for Net ads.

The driver for the upsurge in online ad spending is paid search, where advertisers pay to have ads displayed prominently on search engines like Google. Paid search made up about $2.6 billion in online ad revenues in 2004.

On Monday, InterActiveCorp (IACI) said it'll buy search engine Ask Jeeves (ASKJ) for $1.85 billion.

Time Warner's (TWX) America Online also unveiled its travel search site, part of its search push.

Meantime, Time Warner will pay the Securities and Exchange Commission $300 million for AOL's allegedly fraudulent online ad revenue from late 2000 through 2002.

New York media consultant Jack Myers says online ad spending already beats what's spent on outdoor billboards. He also says Net ads are poised to overtake spending on Yellow Pages ads this year.

The IAB's view of online ads is more bullish than a July report by Jupiter Research that says online ads will overtake spending on magazine ads in 2007, not this year.

Whatever happens, this year's upsurge in online ad spending is part of what analysts say will be a good year in most ad categories.

Overall Ad Outlook Solid

Even without the Olympics and presidential election that ramped-up ad sales last year, ad spending will continue to grow at a healthy clip in 2005, though at little more than half of 2004's torrid pace.

TNS' forecast says all U.S. ad spending will climb 5.1% to over $150 billion in 2005 compared to last year's estimated 9.8% rise.

Outside the Net, TNS says the strongest jump will be in Spanish language TV and cable TV ads. They will grow by 9.4% and 9.3% respectively. Newspaper and radio ads will each rise by 5.1%.

TNS says broadcast network TV ads will rise by 2.9%, while spot TV ads will be nearly flat at 0.6%.

"Advertising is doing better than the general economy," said TNS director of research Jon Swallen. "In nine out of the last ten quarters, total advertising spending exceeded U.S. GDP growth."

Some ad categories may not be hot. Ad spending on traditional radio could be weaker and almost flat this year.

Merrill Lynch recently revised its 2005 radio ad spending growth forecast to 2.9% from 3.5%, with flat estimates for big players like Clear Channel Communications. (CCU)

But Merrill Lynch says satellite radio must attract millions of listeners before it poses a real threat to traditional radio ad spending.

Jupitermedia CEO Alan Meckler doesn't think a growing shift to online ads spells the death of all print magazines.

"Vanity Fair and Sports Illustrated are examples of magazines that will always be around for people who like to 'hold' one in their hands," Meckler said.

But, he says, lost ad money could spell the death of print editions for specialized trade publications.

Meckler says weeklies like Computerworld and Information Week have far fewer ad pages than in the dot-com boom five years ago. He largely blames the rise of online publishing and advertising.

He says it won't be long until tech magazines drop print editions entirely and move online.

Shifts like this will slash money spent on all print magazine ads, Meckler says.

"The cards are stacked against tech trade publishing and I wouldn't want to be in the business," he said.

A Sanford Bernstein report says by 2010, advertisers will spend $22.5 billion on Internet ads and $27 billion on cable TV ads vs. $17.4 billion for magazine ads and $19.1 billion on network TV ads.