NEW YORK 2009 is going to be a challenging year for online video, social networking, and pretty much any segment of the Web publishing world dependent on brand advertising.
That’s because the rocky macro-economic climate has caused performance-based advertising to gain market share at a faster rate, a trend that should continue through much of this year says a new report issued by J.P. Morgan.
According to the report “Nothing But Net: Outlook for Global Internet Stocks in 2009” released today, performance-based advertising has gained an increasingly large share of the total online advertising market over the past five years. The report forecasts that in the U.S. search advertising (which is primarily performance based) will increase by 10 percent in 2009 to nearly $16 billion, while graphical advertising (which includes both performance and brand advertising) will increase by just 6.3 percent to $8.4 billion.
And as brands are forced to take an even more intensive ROI approach this year in light of the ongoing recession, the shift toward performance-based advertising will only accelerate. ”In 2009, we believe the display advertising market will be very tough and face declining CPMs and search will still likely be a winner,” reads the report.
If that assessment proves to be true, that’s not good news for online video, which is typically sold on a CPM basis and is generally geared to traditional brand advertisers, according to J.P. Morgan Internet and entertainment equity analyst Imran Khan.
Unlike several industry observers who in recent weeks have cited online video as a strong spot in the online ad economy, Khan claims that the medium has yet to establish a sustainable business model, despite the massive growth in consumer consumption. Advertisers have “failed to understand the consumer demand,” said Khan during a conference call held Monday.
Plus, advertisers want predictable mass audiences and brand safe content — two qualities that online video sometimes struggles to deliver, according to Khan.
While video is expected to have a tough time making larger inroads in 2009, J.P. Morgan’s assessment of social networking is far dimmer. Khan said he’s “very bearish” when it comes to the advertising-driven business model for sites like MySpace and Facebook, despite some evidence of recent revenue growth.
He pointed to big traditional brands’ continued reluctance to embrace these sites. Plus, more attention is expected to go towards performance-based advertising, and on social networking sites “it’s very difficult to make it work,” he said.
As an alternative, Khan suggested these sites seek to establish alternative revenue models in 2009, such as premium membership offerings (a la LinkedIn) or even virtual goods and services which have become popular in virtual worlds.