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  Advertising is a Cyclical Market

Battelle rightly predicted that online ad spending would grow faster than forecasts, and he collects on that prediction today.

Greg Sterling also talks about the offline ad world may suffer more in the next decline in the ad market.

I think there are 3 major factors working here that led to the under-forecasted growth in online ad spending.

  1. The ROI of online is high.
  2. Huge numbers of eyeballs have moved online.
  3. The resurgence in the overall ad market over the last 3 years.

In other words, online ads are more effective and the shift in spend will continue until the cost of online reduces the ROI to offline levels. Moreover, as more of the world gets broadband, and spends more time online, reach expands and advertisers go after the bigger audience.

Display advertising on the Internet currently accounts for 6.7 percent of total ad spend. That's $10 billion out of the total $150 billion that's spent on advertising.

Clearly there's a lot of headroom for online to grab $30b more of that total spend.

But many have overlooked the cyclical aspect of the ad market. In 2004, the overall ad world exploded off of several bad years from 2000 - 2003. Coming out of that ad recession, advertisers have spent heavily to make up for the lean years. All that spend has been great for many forms of media. In the online world, that spend enabled Yahoo specifically to make gobs of branded/targeted ad money.

My prediction is that there will be a severe damper on things when the ad market starts to decline again - for whatever reason. Online growth will not escape the next ad recession.

Sterling believes that online will fare better because:

When the next recession hits, companies may shift more dollars out of higher-priced media to the Internet, unless of course prices have reached comparable levels online. Even then the perceived efficiency and measurability of online wins the contest.

Greg is probably right, but to me it depends on the level of the overall slowdown and the part emphasized above. Finally, the fact is that online ads are still new and hard to do for the big spenders, so when budgets get smaller, they might become chary of the online experiments.

The traditional offline world knows well how to hibernate through the bad times. For example, agencies lay off tons of people as one early measure.

The big question is whether all the online money chasing ads will have learned anything from 2000-2003. I'm guessing no.


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