Is Online Advertising Heading Off a Cliff?

As the markets see-saw between concern and outright panic over the fate of the U.S. financial bailout, the credit shock that’s rippling through not just North America but most of the Western hemisphere, and the potential for a severe economic downturn, anyone with a Web-based business that depends on advertising has to be asking: Is this the beginning of the end? If the U.S., Canada and to some extent even Europe are in the depths of a recession (or possibly even worse), what does that mean for online ad spending? The answer could mean life or death for some startups.

This debate has been going on for almost a year now. Google’s (GOOG) stock price came under fire around the end of last year and the beginning of this year because of concern that the search giant might see a downturn in ad spending that would hit the bottom line. Has it? A little, but not a huge amount (although some say that could change). In fact, there are those who argue that search-related ad spending is likely to be the most durable even in a shaky economy — in part because businesses can get more bang from buying AdWords than a newspaper ad or TV spot.

So what about the rest of the online ad market? In June, representatives from Seeking Alpha, TheStreet (TSCM), comScore (SCOR), BankRate (RATE) and Forbes said that they were seeing media buys that were smaller and more short-term. However, Web ad spending in the U.S. was one of the only ad sectors to grow in the first six months of this year, and the IAB says that Britain saw higher than expected growth as well. Many marketers believe that online advertising has actually been benefiting from the economic uncertainty, as advertisers look at the Web as more measurable and effective.

Svetlana Gladkova at Profy says that the concern about advertising in the wake of a sour economy led her to take a look at what happened during the Great Depression, and she found that to her surprise, the advertising business was actually pretty healthy during those years.

Are ad-dependent businesses going to sail through the economic turmoil without a care? Hardly. But an online-advertising apocalypse doesn’t seem terribly likely either. If anything, it seems as though traditional media should be the one feeling twitchy at this point. The competition could be intensifying.

Comments

[Michael Eis...:]

You are so right. the secular trends in online are enough to mute the downturn. Online ad spending will no escape on unscathed but i think a bigger knife will be applied to TV where advertisers are beginning to realize that they are wasting their time and money preaching to Tivo boxes.

2008 Oct 07 06:54 AM

[Chris S:]

I wouldn't go so far to say that the online advertising market won't be affected by the downturn. The largest buyers of ads online are autos and financials, neither of which are doing particularly well right now.

That said, I do think that certain plays are a steal right now, specifically SCOR, VCLK, and OMTR. Plays that enable a company to get more out of the dollars they do invest online seems like they would do well when everyone starts to penny-pinch. All three have been beaten hard by the markets recently and can be picked up on the cheap.

2008 Oct 07 09:58 AM

[Credit Card...:]

While the whole online ad market may fare decently, many key sectors could take a big dent out of growth. Financial service companies foot some of the largest bills. It may be only a matter of time before they pull back. (And its surprising they haven't done so already)

2008 Oct 07 05:25 PM

[Dan Jacome:]

SCOR is cheap on a deal comp basis. Pure plays like SCOR got taken out on a 4x sales and 20x EBITDA basis last 24 months Of course, markets were different then, so applying an arbitrary 20% discount to those metrics, you get SCOR pretty darn attractive @ $12 a share.

$12 would reflect a reasonable 16x to my 09 EBITDA/sh estimate of 70-80c and 3.2 its 08 expected sales of $120M. I used 35M shares outstanding to keep it simple.

The tell will be what we get on Q4, which are out on 10/31 I think. I am looking for 7-9c, but there is a good chance my numbers are too high.Good guidance on ARPU heading out of the year as well as net add customers in this last qtr could rocket the stock, on the other hand.

2008 Oct 08 04:05 PM

[Dan Jacome:]

apologies, I meant q3. q3 is on october 31

2008 Oct 08 04:06 PM

[User 286297:]

Online advertising will continue to fairly successful in all of this economic uncertainty for one reason: Smaller companies can trust it more.

With the ability to measure the EXACT number of visitors and business gains you make from online advertising small companies have little choice but to use their money where it can be most effective (or in the very least have the most certain impact).

2008 Oct 26 11:52 PM

[FreeKii Ads:]

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2008 Nov 05 04:12 PM