Credit Collapse Dampens Prospects for Web Advertising

Evidence continues to mount that Internet advertising will be hurt by deteriorating economic conditions.

Days after ZenithOptimedia cut its digital ad forecast, three more institutions this week slashed their estimates to reflect the deteriorating economic picture. The clear consensus: Online advertising won’t grow as fast as everyone had expected, at least for the next 15 months.

Analysts only differ on the particulars. UBS cut its short and medium-term revenue estimates for several publicly traded Web companies. It slashed Google’s 2009 anticipated revenue by 4 percent, Yahoo’s by 9.1 percent, and ValueClick’s by a stunning 19.3 percent. Estimates for Q4 2008 were also lowered, though not as much. Investors seem to agree, as all three companies are trading sharply lower this week.

Wachovia meanwhile said Web ad spending will grow by 10 percent next year rather than the previously estimated 15 percent, Reuters reported. Weak as that outlook is, it compares favorably to Wachovia’s estimates for magazine and newspaper advertising, which it believes will contract severely next year in light of the downturn.

Additionally, Lehman/Barclays shaved a full $3 billion from its 2008 U.S. online ad estimate, pegging growth for the year at 16.9 percent rather than 23.4 percent.

Underlying all those revised forecasts is the new given that many marketers will cut ad spending across the board as the bad times roll.

UBS analyst Ben Schachter notes, “We see no business model based on advertising or consumer spending that will be immune to a downturn…As corporate profit forecasts come down, we expect planned advertising spending will be delayed and/or cut.”

Display ad sellers like Yahoo, ValueClick, and AOL are especially vulnerable, according to Schachter and others. However, Google faces perils of its own — including a unique reliance on the marketing behavior of small to mid-sized businesses.

How these businesses will behave as the recession drags on remains to be seen. Borrell Associates, a media research firm, is now revising downward its 2008 estimates for small and local advertising. Even so, Borrell President Colby Atwood said the Internet retains appeal for small marketers because they can spend in relatively small amounts.

“To the extent that a small business can advertise, we’re going to see them put a lot into [digital] advertising,” he said. “We’re going to see online do a lot better than other media.”

Indeed, there are signs the crisis will accelerate the Web’s takeover of ad budgets — even as those budgets are cut.

Like many others, global media services firm ZenithOptimedia this week reduced its estimate for digital spending growth this year and next. But it also believes Internet advertising will command 13.8 percent of the global ad market by 2010 — up slightly from its June forecast.