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  1. Ads & Marketing
July 18, 2008

Digital ad revenues are still growing, but the signs of distress are everywhere

By Peter Kirwan MM blog

How vulnerable is digital advertising?

In the US, a company called ValueClick — the second-largest online ad network in the country — yesterday announced weak earnings and cut its financial forecasts.

Logically enough, the company’s boss told investors that advertisers are becoming “increasingly performance-oriented”. In other words, they’re less interested in branding, more interested in lead generation.

Theoretically, this should rebound to the advantage of Google. Yesterday, however, Wall Street marked down the company’s shares aggressively when it revealed slowing revenue growth (43% YOY vs. 63% a year ago.)

MSN has problems, too. In Q1, Microsoft’s ad business (excluding aQuantive) grew by 26%. Yesterday it revealed organic revenue growth of just 8%.

Against this backdrop, here in the UK, there’s some plausibility in the recent claim by New Media Age that portals like AOL, MSN and Yahoo! are “offering inventory, in some cases premium space, at cut-price rates as they struggle to hit targets”.

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Something equally unpleasant — or worse — must be going on inside the digital departments of newspaper groups.

A few optimists suggest that the shriveling of financial services ad spend is causing the trouble.

“There’s been a drop-off in advertising from financial services so [media owners] are having to chase money harder, so it makes sense to drop prices.” That’s the verdict of Paul Wright, director of sales at Sky Media.

Ron Horler, managing director of Diffiniti, actually qualifies as an outright optimist. He tells NMA: “We haven’t seen a downturn.”

By contrast, NMA itself seems to think that UK digital ad market has just endured a nasty turn for the worse.

The magazine claims that price cuts are being made to both premium and niche inventory, and that portals are pushing more inventory through exchanges in a bid to hit targets. Budgets are being “slashed” and there’s talk of “half-price rates”. Online display ads are being pulled, and money is going into SEO and affiliate schemes instead.

According to David Hart, co-founder of digital agency Codegent, clients are focusing “optimisation, usability and customer insights. . . making what they have work much, much harder.”

All of this might be true, but it’s still too early to suggest that the forward march of digital revenues has been halted.

This much is clear from The Institute of Practitioners in Advertising’s Bellwether Report, which was published on Monday.

The report, which surveys the marketing intentions of 250 large UK-based companies, does suggest that marketing spend has fallen for the third quarter in a row. And it does say that spend is now declining at the fastest rate since the aftermath of 9/11 in 2001.

But — surprise, surprise — The Bellwether Report also notes that expenditure on online marketing is still increasing. In fact, it’s the only medium on which marketers are spending more money as the economy continues to deteriorate.

Granted, the rate of growth is disappointing. According to the report, internet ad budgets are only growing at 6% annually.

That’s still reasonably nice work if you can get it. But the next question on the horizon is a nasty one: can digital advertising budgets avoid going into reverse?

MSN’s internal problems might have contributed to the division’s single-digit percentage growth rate in Q2. But the signs are that a large slug of the digital economy is following it down the dreary path toward zero, or even negative, growth.

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