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Search Ads Stay Strong in Rough Economy

Posted on: Tuesday, 20 May 2008, 09:00 CDT

By Stephanie Clifford and Miguel Helft

In the past few years, Web publishers have made a big bet on booming online advertising revenues. But the U.S. economic slowdown, which is being felt around the world, could throw a wrench into those plans.

While search advertising remains strong, there are signs that the growth in online advertising - particularly in more elaborate display ads - is slowing down. In the past few weeks, major online- advertising players, like Yahoo and Time Warner, have posted mixed financial results.

And online publishers may be getting less money for the ad space they do sell. The prices paid for online ads bought through ad networks dropped 23 percent from March to April, according to PubMatic, an advertising-technology company in Palo Alto, California that runs an online-pricing index. Large Web publishers fared the worst in PubMatic's study, with the prices they received through networks slumping 52 percent.

These are only preliminary results, and the economy could turn around more quickly than anyone expected even a month ago. But these numbers must be worrisome for Web portals, newspaper publishers and news media companies like CBS (which announced a $1.8 billion deal last week to buy CNet Networks, an online technology news provider) looking to expand their revenues from high-priced display advertising, like graphics-heavy banners and column ads.

"The weakest form, the one that's most susceptible to a downturn - and this is what we're seeing - is display advertising," said Jeffrey Lindsay, a senior analyst at Sanford C. Bernstein.

Display advertising at the AOL online network declined in the first quarter, compared with a year earlier.

"We were not satisfied with the performance of display advertising on our owned and operated inventory, which declined compared to last year's first quarter," said Jeffrey Bewkes, the chief executive of Time Warner, which owns AOL. (Bewkes blamed AOL itself, not the economy, for the company's poor performance.)

The growth in online advertising is also slowing at The New York Times Company, the publisher of the International Herald Tribune. In the most recent quarter, Internet ad revenue increased 16 percent. A year earlier, it increased 20 percent.

In late April, WebMD Health reissued its earnings guidance for the year, revising revenue to a range of $380 million to $395 million, down from a range of $395 million to $415 million.

The change reflected "a recent shift toward shorter-term buying commitments in certain of its customers' consumer advertising purchases, which the company believes is driven by increased caution in the current business climate," WebMD Health said in a statement.

At Weather.com, a similar wariness has arisen. New advertisers are looking to test their ads before committing.

"The new advertisers are more cautious about requiring some sort of proof or evidence that something is working," said Paul Iaffaldano, executive vice president and general manager of the Weather Channel Media Solutions. Existing clients, he said, were continuing to spend, just not at the same pace.

One area that remains strong is search ads. They are considered cheap and effective among marketers - even in a potential recession - and they are how Google makes the majority of its money.

In the most recent quarter, Google had a profit of $1.31 billion on revenue of $5.19 billion. Its U.S. revenue was up 30 percent from last year.

Outside the United States, search advertising typically makes up a larger share of online advertising; that means overall spending could remain stronger, for the time being at least.

Google's chief executive, Eric Schmidt, dismissed talk of concerns that the company would be affected by the slowdown. "It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by," he said. Yahoo, which last year revised its guidance because of a weakening display market, had a first quarter that beat the average analyst expectations, with revenue rising 9 percent, to $1.82 billion.

Yahoo did not specify how much of that was fueled by search, which makes up a chunk of Yahoo's revenues, and how much was display.

Microsoft's advertising revenue, excluding its acquisition of aQuantive, an online-advertising company that Microsoft bought for $6 billion a year ago, grew by 29 percent, up from 23 percent in the quarter a year earlier. But overall profit dropped by 11 percent, to $4.39 billion. Lindsay, of Sanford C. Bernstein, said that recession fears might actually help some media companies, as marketers move their budgets online.

"In a moderate or even quite severe downturn, online advertising actually improves, because people switch their advertising budgets out of traditional advertising formats - TV, radio and print - and move more online because it's got higher performance, it's cheaper and it's more measurable," he said.

He also cautioned that such a increase would only go so far.

"If the downturn is so severe that advertisers stop advertising altogether, or face financial difficulties, then online is affected like everybody else," he added.

Some of the ad dollars that in the past had been spent at portals are being spread around instead. Ad networks, which fan out ads to thousands of sites, are adding targeting and are signing up reputable sites, making them more attractive for advertisers.

"There was a time when we would go out and buy inventory on the portals," said Quentin George, global head of digital media and strategic innovation at Universal McCann, which plans media for clients like L'Oreal and Sony. "Portals make it easier for us to buy and place media on behalf of our clients. But as time continues and as analytics capabilities increase, you find that your media dollars can work better elsewhere across a range of different sites."

Michael Hayes, senior vice president and managing director for Initiative Interactive, which handles digital spending for clients like Home Depot and Bayer, said that advertisers might be turning away from broad buys and looking for more targeted campaigns on smaller sites. "This is hurting the portals," he said. "There are more options."

A bright spot for these publishers in a sluggish economy is the possibility that they may convince marketers who have never spent money online that this tough economy is their chance.

Cheryl Barre is one of those marketers. She arrived 18 months ago at Arby's Restaurant Group as chief marketing officer, but did not introduce her first ad campaign until April of this year. By the time the campaign was supposed to begin on April 27, though, worry about a recession was mounting.

So Barre put together commercials offering deals on food. But she kept Arby's online piece of the campaign, marketing the company for the first time through a Yahoo homepage takeover and a Facebook page.

"I'd hate to say we're late to the party, but we're getting our act together. For the first time, this year we allocated some significant resources to online media," Barre said. "We haven't scaled back at all."

Source: International Herald Tribune

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