Media Outlook: Interactive – A Building Year

Interactive has been down so long, it’s got nowhere to go but up.

The light at the end of the tunnel is growing brighter for online advertising. The proliferation of broadband users, rich-media ads and better metrics, among other factors, are expected to drive a slow but steady recovery for the sector. This year’s increase in online ad spending—the first since plunging a combined 23 percent in 2001 and 2002—is expected to be followed by another in 2004 and subsequent years, according to analyst reports.

Still, the growth “especially when you’re down in the dumps is sometimes misleading,” warns Kevin Carton, global leader of the media and entertainment practice at PricewaterhouseCoopers. “It’s the boom, the bust and the build back up.” Says Leo Kivijarv, director of research and publications at Veronis Suhler Stevenson, “The only place it had to go was up.” By most estimates, spending levels will not surpass 2000’s peek of $8.2 billion until at least 2006.

Advertisers will allocate about $7 billion to Web advertising next year, a PwC report predicts, up 6 percent from an estimated $6.6 billion in 2003. Post-2004 projections from Veronis Suhler Stevenson are less bullish than PwC’s. While PwC anticipates a 10 percent compound annual growth rate from 2005 to 2007, Veronis offers a more modest 7 percent figure.

Explains Veronis’ Kivijarv: right now, advertisers see the Internet as a low-cost alternative to mainstream media. However, he anticipates, “If the economy gets out of its funk, they will go back to TV for 2004 and 2005.”

No matter what, the habitual consumption of news, entertainment and goods on the Web can’t be overlooked. Overall. Internet penetration will hit a “saturation” level of nearly 70 million households next year, thus making the medium appealing for advertisers, reports PwC’s Carton.

The sector’s resurrection can be attributed in part to new forms of online advertising.

Rich media advertising, for one, has gained traction over the past couple of years, with marketers putting $212 million behind it last year. The ads, which deliver sound and full-motion video, benefit in their resemblance to offline formats. “When someone sees something that strikes them in their gut as advertising, all of a sudden they say, ‘We should be doing that,'” explains Michael Zimbalist, executive director of the Online Publishers Association.

“Rich media is more akin to TV. It’s easier to understand and explain. By all indications, it’s more effective than flat ads,” says Chan Suh, chairman and CEO of Agency.com, a New York-based Omnicom Group i-shop that has crafted rich-media campaigns for clients like British Airways and Discovery Channel.

And one of rich media’s drawbacks—the format’s incompatibility with dial-up connections—is diminishing as Internet users migrate to high-speed services. Households subscribing to broadband services are projected to grow 27 percent from 19.8 million this year to 25.2 million next year, according to PwC, while those using narrowband will shrink 3 percent from 44.2 million to 42.8 million.

Also contributing to online advertising’s recovery is Web publishers’ growing acceptance of various ad units. Over the last few years, online properties have added rich media, as well as half-page ads and skyscrapers, to their inventory in an attempt to attract marketers with bigger creative palettes. It appears to be paying off: an OPA poll of 24 online publishers, including New York Times Digital and ESPN.com, showed that first-quarter ad revenue grew an average of 41 percent over the year-ago period.

Keyword search advertising is another format that promises to bring in dollars from companies seeking to position their products on highly trafficked search engines. The increasing importance of this type of advertising, where companies pay for a favorable spot or more frequency in search-result listings, is further evidenced by Yahoo!’s $1.63 billion proposed acquisition of Overture, a provider of pay-for-performance search. The deal aims to take advantage of the burgeoning segment, which is projected to grow from about $2 billion by year-end 2003 to about $5 billion by 2006, according to Piper Jaffray.

As online advertisers and publishers embrace new ad formats, media planners and buyers are adopting reach-and-frequency tools, which let them apply the same metrics used to evaluate offline campaigns to the Internet. These recently introduced tools will help marketers compare the Web’s effectiveness with other media, thus putting the Internet on an equal footing, according to PwC’s Carton.

Roni Jenkins, partner, director of communications strategy at digital@jwt, the interactive arm of WPP Group’s J. Walter Thompson in New York, says that these tools will likely resonate with brand marketers. “It allows us an apples to apples comparison across various media vehicles,” she explains. “Clients speak in reach/frequency, GRPs and audience. … It is a language they understand and know and tend to respond to.” Adds Carton, “Before it was a wing and a prayer.”

Ann M. Mack, a reporter for Adweek, edits the IQ newsletter.