The bright future of online advertising

March 26, 2008

Despite my previous post on the gloomy outlook for startups for the next 12 months, I am more bullish than most on the online advertising market.

Advertising expenditures have a tendency to decline during recessions and the online advertising market collapsed in 2001 after the Internet bubble burst. However, I predict things will play out differently this time. The online ad market is not supported by billions of dollars of silly VC money as it was in 1999.

Companies now have the tools to monitor the ROI on their online advertising. As such, if anything a recession would probably accelerate the transition from offline advertising to online advertising as companies become more ROI focused. Given that online media represents about 20% of media consumption but only around 5% of advertising spending, it still has a lot of growth ahead of it.

That is not to say that growth is not going to slow down. The largest budgets are still controlled by big brands and agencies who don’t invest much online yet and who are going to be even more risk averse in a difficult environment, but the trend from offline to online is inexorable.

Google is going to great pains to make online advertising more attractive to advertisers. To decrease accidental clicks they recently changed their AdSense policies to:

  • Clearly separate Google Ads from the content of the web site
  • Enforce more standard Google Ad formats
  • Only make the title and the link clickable in the ads (and not the text description or the entire row)

All those changes decrease the click through rates on their ads, but should increase conversion rates for advertisers which in theory should allow them to bid more on keywords. All those changes are bad for revenues in the short run for Google and its AdSense partners, but should pay off in the long run.

Conclusion: The recession will decrease the short term growth rate of online advertising, but accelerate the transition from offline advertising to online advertising.

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