Cowen Analyst Jim Friedland: Online Ad Spending Won't Fall Off a Cliff

It's tough to find much in the way of good tech news these days, but the latest report on the online advertising market from Cowen and Co. analyst Jim Friedland includes a few bright spots, even as he reduces his projections for the rest of 2008 and 2009.

First, the bad: For 2008 Friedland lowers his growth forecast for online advertising in the U.S. to 10%, predicting that it will reach $23.4 billion, from $21.2 billion in 2007. Next year will be ugly--he projects an anemic 3% bump in online ads 2009, to $24.1 billion, primarily due to weakness in display advertising. The analyst also cuts his growth estimate of the U.S. paid search market to 11%, to $15.7 billion, down from 17%, and projects a high, single-digit decline in U.S. display ad budgets in 2009.

But Friedland isn't as bearish as some forecasters, who predict the kind of cratering in online ads akin to what occurred during the last recession in 2001 and 2002. Back then, online advertising fell 26% from a peak of $8.1 billion to a trough of $6 billion in 2002. Friedland argues that the current market will not experience a similar meltdown because in those days online advertising was still seen as an experimental medium, meaning it was among the first costs to be cut when ad budgets were trimmed. He also notes that much of the online ad spending at that time was driven by "overcapitalized startups, which had sizable online ad budgets and no revenues," and that ad spending evaporated when the capital markets dried up. Finally, Friedland notes that almost all online spending in 2001 and 2002 was on branding, which is highly vulnerable to cuts during a recession, and that the paid search market had yet to evolve.

Bottom line, Friedland expects the U.S. online advertising market to grow at a five-year compound annual growth rate of 8%. Online advertising will account for 8.7% of total U.S. ad budgets in 2008, growing to 25% over the long term, he says, basing his projection on the historical evolution of the television/cable ad market. Search advertising will eventurally account for 10% to 15% of global ad budgets, versus 4% in 2008, which no doubt will benefit search leader Google Inc. [GOOG]. In light of that, Friedland recommends buying Google shares, which he rates as "outperform"; unsurprisingy, he doesn't appear to have the same love for Yahoo! Inc. [YHOO], which has a neutral rating. --David Shabelman

See Nov. 12 post from FT.com
See Nov. 12 post from GigaOm

Comments

[Chris B:]

In a recession, return on investment dollar declines. There's no reason to believe that law would apply to every other form of advertising EXCEPT internet. If you can prove otherwise, you might as well put it in the form of a marketing PhD dissertation.

2008 Nov 14 04:34 PM