IQ News: Will Global Economic Crisis Drag the Net Along with It?

With investors bailing out on the tech-heavy Nasdaq Composite, increasingly bearish predictions of a recession and global economic crisis looming, the question has been posed by some industry observers: Could the momentum of the Internet marketplace–specifically, the growth rate in online ad spending–be derailed by these unfavorable economic indicators?
As with everything in the nascent market sector, there isn’t enough raw data to make an accurate read on what the future holds, analysts say. But if the trends in traditional advertising spending are any indication, then a recession likely will have a negative impact on the growth rate for Internet ad spending. However, a flagging stock market (such as what occurred earlier this month when the Nasdaq eroded by more than 20 percent in a two-week span) is not necessarily a recipe for a slowdown in online ad spending, they contend.
“The correlation between the economy and advertising is that when the economy begins to slow down, advertising tends to lag behind it,” explains Robert Coen, senior vice president, director of forecasting for McCann-Erickson, New York. “But the economy hasn’t slowed. There’s just a lot of fears it will.”
Coen reported this summer that overall ad spending for the first half of the year increased by a rate of more than 9 percent, the same period in which the U.S. gross domestic product–the most common yardstick for measuring the health of the domestic economy–was up by 5 percent. Subsequently, he predicted a minimal slow-down in overall ad spending in the second half of the year attributed to the continuous erosion of network television ratings and the absence of any blockbuster events like the Olympics. He added last week that he wasn’t changing his prediction in light of the recent Wall Street slump. More reliable economic indicators in predicting ad spending are the employment and inflation rates and they haven’t yet dipped, he added.
Some suggest the recent slide in the Nasdaq Composite could directly affect the advertising activities of technology companies–still the biggest spenders in Web advertising, accounting for 27 percent of the $351.3 million spent in the first quarter of 1998, according to the Internet Advertising Bureau’s Internet Advertising Revenue Report.
The good news is that online publishers aren’t as reliant on tech advertisers as they once were. According to Pete Petrusky, the director at PriceWaterhouse Coopers, New York, who compiled the IAB report, consumer-related advertisers such as Unilever and Procter & Gamble chipped in 25 cents for every dollar spent in Internet ad spending for the first quarter of 1998. Petrusky reasons that should initiatives like the P&G-sponsored Future of Advertising Stakeholders Summit result in more deep-pocketed advertisers spending money online it could offset any negative impacts of a recession.
“Timing is everything though,” Petrusky states.
One crucial sector of the business that is almost certain to suffer is the market for initial public offerings, says Steven Tuen, director of research for New York-based consultancy, IPO Value Monitor. “I expect the IPO market to remain very subdued through December and it could slow down through the first half of next year only because the market is so volatile,” he says. Companies seeking an injection of public funds may postpone their plans, just as top underwriting firm, New York-based Goldman Sachs did earlier this month, rather than face an environment of fickle investors, Tuen observes.
Still, CBS MarketWatch, San Francisco, no doubt benefitting from the public’s increased craving for financial news, announced last week it had filed with the Securities and Exchange Commission their intent to raise $34.5 million in an IPO, which could happen as early as December.
Other startups looking to raise smaller amounts of funding shouldn’t necessarily be concerned that the investment cash flow is drying up, Tuen says. “I think if anything there’s more money in the [venture capital firms] at the moment,” he said. But potential investors certainly will be more cautious than just six months ago, he warns. “A lot of investors now are trying to preserve whatever gains they’ve made already this year.”