Eastern Europe Web Ad Market Holds Opportunity and Challenge

Digital advertising within Eastern Europe received increased attention in 2008, as major players snapped up investment across the region, and looked to developing markets to help offset slowing revenues from more established markets such as those in Western Europe and the U.S. Factors such as a rapidly growing Internet population and a boom in social networking have helped fuel audience growth and advertiser interest. Yet, although individual markets like Romania, Latvia, and Poland, are at varying levels of maturity, some believe they should all be work together more closely to drive adoption and foster the kind of growth witnessed in Western Europe.

Aegis drew attention in June with its purchase of full service agency, AdWatch, which it claimed at the time would crown it the premier digital player in Russia. WPP promptly followed suit, and purchased a majority stake in Alite Ltd – a digital agency that trades under the name of Actis, and provides online marketing strategy, design, and development for clients such as Microsoft and MTV throughout Eastern Europe.

Perhaps most significantly, Google announced in July it planned to acquire Russian contextual ad network ZAO Begun for a fee of $140 million. Although the deal was eventually blocked by Russian regulators, the attempt demonstrated the Russian market’s appeal to the digital ad behemoth. “We consider Russia an important country and are committed to it,” a Google spokesperson told ClickZ at the time.

While there’s little doubt that growth across the region is being led by the thriving Russian scene, markets elsewhere are gathering steam. For example, a number of Interactive Advertising Bureau satellite organizations based in Eastern Europe have formed to help drive adoption of online ad solutions. Even in small markets such as Lithuania and Latvia, awareness is growing.

Many markets in the region remain in nascent stages. However, Alexander Kim, interaction director at GroupM Russia, suggested U.S. and Western European firms underestimated the potential of Eastern European markets and may be too late to the party. “In my view the key specificity of the Eastern European online market is that we are not as globalized as other European countries,” he said. “Global companies came too late, they didn’t have adopted marketing strategies and well [localized] Web services,” he explained.

Within Russia, prime examples of this lie in both the search and social media space. Facebook and MySpace have both found themselves overshadowed by local social networking services such as Odnoklassniki.ru and Vkontakte.ru, both of which currently boast over 30 million subscribers each. Likewise, Google struggles with market share in Russia, with local rivals Yandex and Rambler dominating the search landscape. When Google’s attempt to buy a chunk of that market by trying to acquire ZAO Begun was thwarted, it served as evidence of the Russian market’s insularity.

Overall, Kim estimates the Russian market is currently two or three years ahead of its Eastern European counterparts, and suggests the diversity and relative sophistication of advertiser spend there is helping pave the way for its less developed neighbors. “In Russia, advertisers use online not only for direct response but also to build brand awareness and loyalty. Also, more vehicles are used, such as video advertising, behavioral targeting and social media marketing,” he says.

The Scene Outside Russia
In most Eastern European countries outside of Russia however, display formats are still attracting the lion’s share of ad spending, sold mostly on a CPM basis across just a handful of local portal and news sites, as it was in the early days in the U.S. and Western Europe. Ionut Oprea, executive director at IAB Romania estimates that between 50 and 70 percent of ad spend across the region currently goes toward display, while the remainder is directed toward search and contextual offerings. Kim suggested display advertising garners closer to 80 percent outside Russia.

For instance, display advertising accounts for around 70 percent of online ad revenue Lithuania and Latvia, according to Aurimas Lapinskas, a director at Lithuanian ad network AdNet. “The perception of the Internet as another mass medium has helped it to grow big [in Lithuania and Latvia], but a lack of knowledge about how to interact with consumers, and how to use it as a selling channel has prevented more sophisticated spend,” said Lapinskas. He added, “Investment in Google AdWords and AdSense is less than 20 percent of Internet spend.”

Even within these smaller, less developed Baltic markets, investment in digital appears to be outstripping “traditional” media. According to Lapinskas, online spend has grown by around 50 percent year over year in the past four years. “We assume that in 2009 the Internet will take money from other media,” he forecast.

Larger markets like Romania and Poland may not be quite as advanced as Russia, but adoption of online advertising appears to be picking up rapidly there, too. Jaroslaw Sobolewski, general director at IAB Poland, estimated that spending on online advertising in the country overtook newspaper spend in 2008, and is now third after T.V. and magazine ad revenue. Advertisers there are moving far beyond display; in the first half of 2008, IAB Poland reported that display revenue accounted for around 36 percent, paid search 26 percent, classifieds 22 percent, and e-mail marketing 7 percent. Other online ad and marketing formats made up the remaining 9 percent.

Despite positive growth throughout Eastern Europe, IAB Romania’s Oprea warned the industry needs to work together to drive adoption in order to foster the kind of growth witnessed in Western Europe. He described a “vicious circle,” in which a relatively small share of total media spend results in modest attempts to promote the medium, keeping investment low as a result. “The Eastern Europe online industry needs to proactively hard-sell itself to agencies and advertisers. For that the industry has to gather around associations such as national IAB structures, and each company has to contribute,” he said.

“Sure, there are advertisers that switch from print to online here and there, but we can’t talk about a trend in switching to the Internet in all Eastern Europe countries yet.”