Study: Online Ad Budgets to Swell to $26 Billion by 2010

Online budgets are set to swell $26 billion, or 8 percent of total advertising and marketing spending, by 2010. That’s according to a new five-year forecast by Forrester Research.

In the short term, some of the money will be shifted away from traditional media vehicles, especially magazines, direct mail and newspapers. Of the 33 percent of marketers who said they’d decrease other budgets to fuel online ad spend in 2005, 11 percent will take the money from magazines, 8 percent will shift it from direct mail, and 7 percent will rob from the newspaper budget.

Forty-seven percent of marketers, however, said they were funding increased online ad spending this year by upping the total ad budget, rather than by decreasing other media spending.

Traditional media may be vulnerable to more cuts in the future, the research indicates. When asked about the effectiveness of different media over the next three years, 53 percent said they thought TV would be less effective; 53 percent pegged print classified as less effective; and 46 percent thought newspapers would lose effectiveness. Meanwhile, the majority of marketers thought SEM, display ads and Web sites would become more effective over the same period.

“Traditional channels really suffered,” said Charlene Li, principal analyst at Forrester. “Across the board a good chunk of marketers felt that those channels would be less effective. And they saw themselves shifting dollars to the new channels.”

Search will be the primary driver behind online advertising’s rise, increasing by 33 percent in 2005 but slowing to a 10 percent growth rate by 2010. Forrester believes search will continue to represent the biggest piece of online marketing budgets in 2010, bringing in $11.6 billion.

“Search definitely is growing very very quickly, but the growth rate is slowing, as you would expect,” said Li.

The second major factor behind the rise will be an increase in display advertising, which is expected to grow at an 11 percent rate over the next five years. The researchers believe display will be the second biggest category in online marketing by 2010, representing $8.1 billion in spending.

“That’s an indication to me that marketers are beginning to see the Internet as a good place to put branding dollars,” Li told ClickZ News.

The research has significant implications for advertising agencies, said Li, because the time and effort involved in online advertising results in decreased margins.

“Online adverting is hard,” said Li. “The nice margins that they got from buying millions of dollars of television aren’t going to be there from online advertising, but that’s what their clients really want.”

Li suggests that agencies can cope by making investments in time saving technology and working to become more efficient.