Online advertising hit by spending cuts

Shudders from the credit crisis have reached the online and media industries as research shows that internet advertising is facing a slowdown after five years of breakneck growth.

Budget cuts and excess inventory are expected to push the market for online display advertising into decline in the third quarter.

Research published on Monday by Enders, a media analyst group, pared back growth rates for the UK online advert market to 18.5 per cent for 2008 to £3.3bn, against estimates of a 28 per cent increase on 2007.

Financial, recruitment, and property advertisers lead the industry sectors that are cutting back on spending.

The momentum remains in "paid-for search", the largest division of internet advertising, dominated by Google. Ian Maude, the Enders analyst, said many publishers expected online display revenues to be flat or down in the third quarter.

Enders estimates display adverts will grow by 9.8 per cent to £650m, and classifieds by 7.8 per cent - representing a "collapse" on last year's equivalents of 30.5 per cent and 54 per cent respectively, said Mr Maude. In contrast, search adverts will grow by 25.4 per cent to £2bn this year, Enders forecasts, because they give a quicker and easier return on investment.

An expected trend towards brand-building online is not as strong as expected, making up only 5 per cent of online spending. "This is a reality check for online advertising," Mr Maude said.

US group Nielsen has reported a decline in the first half of 2008 for US picture-based advertising. It showed a 27 per cent fall in US financial services' advert spending, the largest advertiser group online.

The slowdown will hit not only web portal owners such as Microsoft, Yahoo and AOL but also publishers and broadcasters who are increasingly looking online for growth.

Search revenues will ensure online advertising is still growing much faster than for other media. But a rapid increase in online display ad inventory, particularly by social networks where response rates are low, is forcing rates down.

"Run-of-site advertising through online media networks are driving down yield for publishers," said Nigel Morris, chief executive of Isobar, the digital division of Aegis, but he added that rates for video advertising online are holding up.

"Advertisers can enjoy lower rates over networks but mainly for direct response," said Guy Phillipson, chief executive of the UK's Internet Advertising Bureau, a trade body. "Premium products can easily attract spend. But there will be quite a few sites suffering in the middle that don't get one or the other."

By Tim Bradshaw and Ben Fenton

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