Internet Outsider

UK Online Ads Pass Newspapers; U.S. Online Ad Spending to Triple?

According to IAB, online advertising spending in the UK in 2006 exceeded newspaper advertising spending.  This amazing fact received less attention in the U.S. than it should have.

One of the big mysteries of the past few years, for those who follow U.S. media, is how and why U.S. newspapers have been able to maintain as much share of the advertising market as they have.  Yes, business sucks for newspapers, but it doesn't suck as much as it should when one considers that the vast majority of the product is printed on wood pulp, shipped around the country in gas-guzzling trucks, and then tossed into recycling bins before it is even glanced at. 

According to Morgan Stanley figures for 2005, U.S. newspapers still generate about $49 billion in advertising revenue (including classifieds).  This compares to about $16 billion last year for Internet, $45 billion for broadcast television, and another $19 billion for cable TV.

Unless there is something structurally different about the UK market--please weigh in on this if you know--the UK statistic suggests that 1) the US online advertising market still has massive growth ahead of it, and 2) U.S. newspapers have not yet begun to feel the pain. 

Two scenarios jump to mind:  1) Online advertising triples over the next 5-10 years, to $50 billion, and/or 2) Online advertising doubles and newspapers advertising gets cut in half.  And then, of course, there's 3) Online advertising triples AND newspaper advertising gets cut in half.

UPDATE: Paul Durham weighs in:

There is something very different about the UK newspaper market - the number and importance of national newspapers. The IAB data shows internet advertising overtaking NATIONAL newspaper advertising. Regional newspapers is a separate category, and took £2.8 billion of ad revenue. So the internet still lags well behind total newspaper advertising in the UK.

Posted by: Paul Durman | April 03, 2007 at 11:15 AM

So, ignore some of what I said above.

Advertisers Fleeing TV, Radio for Internet, etc.

Emily Steel of the WSJ reported startling numbers from TNS Media Intelligence showing just how fast major advertisers are pulling money out of traditional media and throwing it into paid search, digital media, and other "unmeasured" advertising.  This trend has been underway for years, and the figures are backward-looking, but it's no wonder that traditional media conglomerates like Viacom are starting to panic:

In a sign of how major advertisers are shifting money out of traditional media, ad tracking firm TNS Media Intelligence reported that the nation's 50 biggest advertisers cut their spending on "measured" media such as TV, print and Internet display ads by 1.5% in 2006 -- though U.S. ad spending grew 4.1% overall.

While some of the decline may reflect overall cutbacks in ad spending by big marketers, it likely signals that big companies such as Procter & Gamble are reallocating some of their ad budgets to new Internet ad venues which aren't measured by TNS -- such as paid-search advertising, social networking and online video.

Not surprisingly, the report showed that growth in ad spending on traditional media, particularly newspapers and radio, continued to slow dramatically while spending on Internet display ads is accelerating. But it also highlighted a significant slowdown in ad growth among cable channels, after several years of robust increases.

Viacom Sues Google for $1 Billion. Big Whoop.

So Viacom took the predictable next step in the GooTube pissing match and sued Google for $1 billion.  Why is this irrelevant?

• Because if Google takes the next logical step and goes through the motions of fighting the lawsuit, the companies will be in court for years.  (During which time Viacom's content will become less relevant and YouTube's platform will become more powerful.)
• Because $1 billion in damages is absurd.  Viacom wants headlines--and is getting them.
• Because $1 billion is also chump change in this league.  (The injunction is potentially more problematic, but would likely just force YouTube to do what it will eventually have to do anyway--develop better ways of monitoring what is on the site). 
• Because the lawsuit is just another negotiating move and will disappear when the companies finally come to terms.

Why won't the Viacom lawsuit shut down YouTube the way the music companies shut down Napster?  First, because the resources Google can draw on to defend itself are about a million times as big as Napster's were.  Second, because Google already has plenty of real distribution agreements with other real media companies that will view the Viacom fusillade as a chance to gain online market share.  (These media companies are not likely to suddenly switch sides and team up with Viacom.)  Third, Viacom doesn't really give a damn how many people watch its content on YouTube--they just want to get paid what they view as a less-insulting amount for the use of that content. 

The bottom line: If/when Google finally makes a concession or two, Viacom will declare victory, and the lawsuit will disappear.  Then, a couple of years later, when every media company in the world has a distribution deal with Google and Viacom's content is even less of a percentage of total views than it already is, the deal will probably get renegotiated on more favorable (to Google) terms. 

Privacy Summary: Consumers Don't Care--If You Tell Them

The Open Data morning session ended with a general consensus that consumers would be surprised and outraged by the amount of online data that is being collected, stored, and sold--and that sooner or later some smart journalist will "discover" this secret and trigger a consumer firestorm.

Most attendees agreed that consumers are happy to trade privacy for convenience and that, ultimately, if they like the product, they'll say "whatever" about the data collection.  Most people also agreed, however, that to get to "whatever," consumers have to know that everything they do is tracked, analyzed, and sold--and that the last time anyone read a User License Agreement was 1972.  So the industry has to figure out some way to get the story to consumers before some journalist does.  Because the latter will lead to Congressional hearings, new bureaucracy, and higher legal, compliance, and PR bills...  And who wants that?

ISPs Are Selling Your Clickstreams!

At Open Data, David Cancel, the CTO of Compete, Inc., reveals that ISPs happily sell clickstream data--and that it's a big business.  They don't sell your name--just your clicks--but the clicks are tied to you as a specific user (User 1, User 2, etc.).

How much are your clicks worth?  An symposium member extrapolated from David's round numbers and estimated about 40 cents a month per user (per customer)--a number with which David appears to agree.

Someone points out that this is more information than was shared by AOL in the search-term brouhaha.  It's much more! David says.  Someone else observes that the benefits/drawbacks of this are in the eye of the beholder: for the ISPs it's awesome.  Someone else points out (see comments) that the credit card companies sell far more interesting data than this and no one gives a damn.

David steps down.  Thunderous applause.

Click Fraud Steady at 14%--Click Forensics

Click-fraud consulting firm Click Forensics estimates that industry-wide click fraud in Q4 was 14.2%, which is at the high end of levels measured earlier in the year (the quarters ranged from 13.7%-14.2%).  The firm also estimates that click fraud on content networks--the "affiliates" that advertisers are always complaining about--was significantly higher, at 19.2%.  Most importantly, click fraud was highest on expensive key words (over $2/click), at 21%.

Overall, these figures suggest that click fraud remains an annoying but controlled problem, one that most advertisers view as simply a cost of doing business .  The higher fraud on the content networks and high-priced keywords suggests that Google and Yahoo will have to devote more resources and/or refunds to remedying the problem.  This should ultimately have a modest negative impact on profitability. 

New AOL CEO: Be Afraid

For those who missed it, Time Warner stuck the final knife into the back of the old AOL last week, when AOL's interim CEO, Jonathan Miller, allegedly hand-picked by the outgoing Steve Case, was axed and replaced with a career TV/old media executive.  Miller wasn't an Internet expert, but he'd worked with Diller, who is (now), and he quickly illustrated that he was willing to learn.  And he did a good job, all things considered.  But now he's gone, and so is the final vestige of the original AOL, which once utterly dominated Internet-land--and, later, so mortified the old guard at Time Warner that they've spent the last five years trying to erase the nightmare.

In the short history of the Internet, few old media executives have quickly grasped the ways the new medium is different. Untold thousands, however, have charged into the fray, ready to teach the Internet kids how a real media business works, only to learn, the hard way, that the Internet really is different (not better, just different). 

So what can we expect from Randy Falco, the new head of AOL?  I won't rush to judgement, but the early signs aren't encouraging.  If today's AP summary and Falco quotes are anything close to reality, AOL is about to resume its rapid slide into oblivion:

The incoming head of AOL said Tuesday he left a 31-year career at NBC for the chance to transform the online business into a formidable rival to television and other traditional media, AP writes, suggesting that Falco has yet to notice that ONE Internet company, Google, has long been worth more than the entire television industry combined (and justifiably so). 

''I'm fascinated by the Internet space,'' Falco told The Associated Press. ''I see it as a very exciting environment to be in. It reminds me a lot about network television 30 years ago. It's a little bit like the Wild West. There aren't a lot of rules. That's what excites me about it.''

A "fascinating environment"?  Yes.  And I guess it's good that Falco's excited about his new job.  But given that the next six months will determine whether AOL lives for a decade or dies in a year, one hopes that Falco's gee-whiz attitude is quickly replaced by an understanding that the Internet's wild west days are long gone and that there are crystal-clear Internet rules--one of which is that if you're not No. 1, No. 2, or, at worst, No. 3, you're toast.  And AOL fans should pray, hard, that Falco doesn't follow in the footsteps of some of his transitioning brethren and spend his first six months on the job enthusing about a new commitment to "original programming" and "shows."

Dear Google Bulls: Yahoo Comments Still Suggest Market Problem

Yes, Yahoo has Yahoo-specific problems, one of which is competition.  Some comments on the conference call, however, provide further evidence that the slowdown in advertising revenue is not just Yahoo-specific. 

When asked for the second time about whether the weakness was confined to autos and financial services--and whether the weakness was continuing--Sue Decker said this (transcript courtesy of seekingalpha.com):

We did say that we had seen some weakness in September in those two categories. Those sectors were meant as examples. They are having some industry-specific issues in both cases. We have seen a couple of -- several of the various sectors showing some of that, but we think those are specific to those sectors, and we do think those will continue into Q4.

Translation: We are seeing weakness in more than the auto and financial sectors.  The weakness is continuing.

The quick response from Google bulls is that PPC advertising is different, that advertisers view PPC as a "cost of sales" instead of "marketing spend," and, therefore, that a slowdown in general advertising won't affect Google.  I continue to believe that this argument is wrong. 

If advertising spending slows, it will slow because of weakness in consumer demand (which leads to lower revenue and, therefore, less money to spend on advertising).  Although it is true that you have to spend money to make money, advertising is usually one of the first expenses to get cut in a slowdown.  PPC advertising may be the last form of advertising to get cut, but it will still get cut. 

Why?  Because if consumers go from spending $1.00 on financial services to $0.90 on financial services, the ROI for any advertiser trying to attract that spending will drop.  As ROIs drop, weaker advertisers will reduce spending, which, in the case of search, will eventually filter into either keyword pricing (fewer advertisers competiting for the same keywords) or fewer paid clicks (fewer consumers seeking financial services).  The impact will not necessarily be disastrous, and it will not necessarily be as severe as it is for less-ROI-driven advertising, but there will be an impact.

Thus, I reiterate my prediction: Some of the weakness affecting Yahoo appears to be market-related, and if it is market-related, it will eventually affect Google. 

Analyzing More Ad Market Data Points

Ross Levinsohn of Fox Interactive says that Fox is seeing no signs of an advertising slowdown (per Mediapost), a tidbit suggesting that Yahoo!'s problems may be, well, just Yahoo! problems.  Meanwhile, Lowe's preannounced modestly disappointing results and blamed them on the housing market, as did homebuilder Lennar.  Washington Mutual recently said that the inverted yield curve and rising interest rates have dampened mortgage origination (no surprise), and consumer home equity withdrawals are apparently down year over year.  And the American car companies continue to suck wind.

Put it all together, and Levinsohn's observation does not necessarily support the view that Yahoo!'s recent news is a Yahoo! problem instead of a market problem.  Fox is presumably less dependent on advertising from financial services companies than Yahoo is (specifically, mortgage companies), and, with a younger demographic, it is also presumably less dependent on ad spending tied to the housing market.

Will Yahoo!'s weakness continue?  Is it a market problem that will soon affect other companies, including Google?  Is it the first sign of a slowdown that will spread to other industries?  Still too early to tell.  I continue to think, however, that the Yahoo! news and other data points above are consistent with the start of a general market slowdown, one that will likely gather momemtum if housing prices continue to fall.  The recent drop in rates may help housing prices stabilize (or even rise modestly) in the next few months, but the downward trend will probably resume eventually.

Put differently, I still think the Yahoo! news is a canary in a coalmine--one that the market has, so far, largely ignored.

More on Drooping Ad Spending, Yahoo, Google

Smart debate in the comment section about whether yesterday's Yahoo news reflected a Yahoo issue or a market issue, as well as whether a general slowdown in online ad spending would affect Google.  My take is that it is almost certainly a market issue and that, eventually, it would/will almost certainly affect Google.

As several readers noted, the slowdown was attributed to two sectors, automotive and financial services.  Given what's happening to Ford, GM, and Chrysler, the first isn't a surprise.  Given what's happening to the housing market, the second isn't a surprise either, especially if "financial services" is really a synonym for "mortgage brokers."

A Bloomberg story today reports data from Nielsen that confirms some of the above, but also suggests the problem is worse at Yahoo than elsewhere:

Advertisers reduced the amount they spent on graphical image
ads in the U.S. by 6.3 percent to $163.6 million in the week
ending Sept. 10 after a 2.7 percent drop the previous week,
according to Nielsen//NetRatings...         

Demand for banner ads on Yahoo by financial services
companies fell 4.2 percent to $16.9 million in the week ending
Sept. 10 and 16 percent in the previous week, Nielsen said.
Outlays across the Web rose 2.2 percent for the week ending Sept.
10, after falling 10 percent a week earlier.

The story also notes that, at Yahoo, financial services accounts for an extraordinary amount of revenue.

     Financial services accounted for 33 percent of U.S. display
ad spending on Yahoo at the end of August, the highest of any
category, while automotive took 2.6 percent, according to
Nielsen.

The Bloomberg story focuses primarily on display advertising, and it is possible that, for now, search has been spared.  If the problem is the economy rather than Yahoo, however, as consumer demand falls off, search spending should drop, too.  Less consumer demand will likely translate into fewer clicks (less revenue) or a reduced conversion rate, which will put pressure on advertisers' ROIs (reducing the amount they can profitably pay for clicks).  It is also worth noting that, thanks to their high-ticket sales, both automotive and financial services have extremely high keyword prices, so any fall-off in advertiser spending or end user demand in these categories will have a far greater impact on revenue than on overall clicks.

Bottom line, I have never seen a general industry revenue slowdown that did not eventually affect the biggest player.  If that's what this is, therefore, the safe bet is to assume that Google will eventually be affected, possibly severely.