Analyst: Online Display Ads Set to Surge

The stagnant display advertising space should bounce back in 2010, but it will be up to Web publishers to undertake take more drastic measures to increase the value of their ad space, including reducing inventory and eschewing ad networks.

That’s according to leading industry analyst Imran Khan of J.P. Morgan, who on Monday (Jan. 4) released his annual report, Nothing but Net 2010 Internet Sector Outlook. Khan predicts that display spending will surge by 10.5 percent this year after a 5 percent dip last year, with display CPMs rising by 5 percent.

Yet following a year in which display advertising became undervalued, and the marketplace was dominated by price-fixated performance advertisers, top Web publishers are faced with abysmal click through rates, irrelevant ads, and brands which have been spoiled by the ease of third party networks that promise cheap premium inventory, reports Khan. The result is a huge disparity between brand and performance spending on the Web.

According to J.P. Morgan’s analysis, while overall media spending is tilted only slightly toward direct response (52 percent versus 48 percent for brand dollars) –just 27 percent of online spending goes towards branding. Overall only 5 percent of brand dollars are online versus 30 percent of direct dollars, says the report.

Thus, publishers need to adapt their selling approach when it comes to display, something that is already in the works. “Consumers are banner blind,” Khan said during a conference call. Particularly, after years of growing accustomed to standard IAB banner units, “Consumers are not really paying attention anymore.” And the games that site play to increase ad impressions by spreading an article out across numerous pages are “extremely annoying.”

As a remedy Khan recommends that sites create new more premium forms of banner ads (such as the oversized ad units being pushed by the Online Publisher’s Association), and utilize data targeting and time based selling—all of which should help the industry bounce back in 2010.

Khan argues that sites should also reduce their reliance on ad networks (which is already happening) and even considering serving fewer page views and ads. He cite the example of AOL, which saw CPMs decline by as much as 50 percent when it focused on inventory sell-through at the expense of premium selling.  “I think the industry realizes the mistakes it made,” he said.

If enacted, Khan sees many of these premium selling tactics benefiting the much scrutinized Web giant Yahoo, which he estimates commands a hefty 17 percent share of the display market. However, ad inventory reduction will likely to prove near impossible for social networking properties, which only become more popular. According to J.P. Morgan’s report, Facebook now accounts for 5 percent of all time spent on Web on globe.

The sheer volume of inventory on sites like Facebook, coupled with low response rates, means that in 2010, “Ad driven monetization will remain very difficult,” Khan said. But ad monetization shouldn’t be social networks’ focus, he contends. Rather sites like Facebook should operate like credit card companies—focusing on earning revenue through carriage fees rather than monetizing directly from consumers. More specifically, social sites should look to collect small carriage fees from the vast universe of applications, social games and virtual gifts that thrive on their networks.

Down the road, social networking sites are also positioned to become key sources of referral traffic for publishers and retail sites, predicts Khan—a dynamic that could one day threaten the role of search engines. However in the near term the search ad business remains quite healthy, as J.P. Morgan forecast 13 percent growth in spending for the sector in 2010.