Interactive

IT’S ALL DOWNHILL from here, relatively speaking. 2006, according to experts, is as good as it’s going to get for online advertising in terms of percentage growth, at least for the remainder of the decade. “This year should be the peak,” says David Hallerman, analyst, eMarketer.

Online marketing researcher eMarketer says that the 33 percent growth surge in spending expected this year won’t be matched for a while. Next year, the company foresees total dollars to increase by roughly 25 percent, creeping past the $20 billion mark. That’s largely because search advertising—the key driver of Internet advertising’s recovery a few years ago and still its biggest source of revenue at roughly 40 percent—is about to go from scorching to merely hot. “When the numbers are that large, they can’t continue to grow at such a high rate,” comments Hallerman.

The reason, say industry followers, is that e-commerce-heavy brands that have embraced search can only spend so much money efficiently on keyword ads. In fact, some are becoming so proficient at refining their campaigns that they spend less. That, combined with more traditional, less search-reliant brands coming online, has resulted in slowed growth.

“Search is going to level off,” says Jeff Lanctot, vp, general manager of Avenue A/Razorfish. “The brands that are coming into the space are unlikely to spend 40 percent of their budgets in search like a travel or retail client. That is why you are starting to see Google push in so many other directions.”

Even so, most everyone expects the Internet to enjoy another terrific year of growth that other media would die for. “The overall growth rate is slowing,” says Jim Rutherfurd, executive vp, Veronis Suhler Stevenson. “Compare that to any other medium, and it’s still a great growth rate.”

It may be that the Web is gaining maturity. According to a new report from PricewaterhouseCoopers, the Internet “has shifted from a niche medium used on an experimental basis to a mass medium that commands a central role in an advertising campaign.” From a macro perspective, ad spending on the Web will surpass consumer magazines in 2006 and terrestrial radio by 2009, predicts PwC. Those projections are being borne out in the market, according to Lanctot. “There’s a lot of new money coming to the Web,” he says. “Packaged-goods brands are getting more serious, as are auto manufacturers.” According to PwC’s report, online advertising by automakers rose by approximately 60 percent in 2005.

One segment of the medium that these newer brands are clearly enamored with is online video. A year ago, their interest—driven largely by an intense desire to repurpose their bread-and-butter ad units (the 30-second TV spots)—appeared ahead of users’ interest. Then a site called YouTube arrived.

“Video has been much publicized, with good reason,” says Lanctot. “[Besides increasing] the number of people it has drawn to its site, YouTube has really changed the consumer expectations of video on the Web. It has increased the frequency with which viewers watch video. That was the missing ingredient.”

So expect tons of media activity on the video front next year, as evidenced by a string of recent deals, including a syndication partnership between MTV and Google, a new video marketplace launched by NBC, and nearly every broadcast network electing to stream a major chunk of its fall schedule.

However, despite all the activity, video consumption on the Web remains nascent, and thus eMarketer predicts that online video ad dollars will account for just 10 percent of overall Internet advertising, a roughly $2 billion nugget.

Meanwhile, the other well-chronicled, monster Internet trend from the past year or so—social media/user-generated content—may find itself in the opposite position of online video: one where users are way ahead of the advertisers. Lanctot says sites like MySpace and Facebook, while hugely popular, are still in the early development of revenue models. “I don’t think any of them are making significant money,” he says. However, given marketers’ enthusiasm for what’s hot, this is the year they will likely start. Mike Shields covers interactive media for Mediaweek.