In a report
jointly issued by the Internet Advertising Board and the New Media Group of
PricewaterhouseCoopers, revenues from Internet advertising reached $693 million
in Q1 1999, an increase of $38 million over the previous quarter and $342 million
(almost double) the same quarter in 1998.
This is certainly
good news, although not unexpected, for the advertising industry. Agencies that
are responsible for creating ads will rush to hire more artists and programmers
with Internet expertise. Websites will redouble their efforts to attract advertisers
and a few marketing heads may roll at websites whose advertising revenues
do not match the trends. But what are the trends?
Figure 1 shows
the quarterly history of advertising revenues:
The dark line
shows the actual revenues and the lighter line shows the quarterly increase.
The jerkiness of the increase line suggests that there are different trends
at work. Plotting each of the quarters separately shows this clearly:
Figure 2 shows
more clearly that each quarter has its own characteristic trend -- exactly what
a retailer would predict. What does seem interesting is the increase in slope
(rate of growth). Although formal mathematical analyses lose accuracy with so
few data points, these charts give support to the frequently quoted hyperbole
that ad revenue growth is exponential.
are all kinds of exponential growth rates. Figure 3 shows the ratios for corresponding
quarters; that is, the ratio of the values in each quarter with the corresponding
quarter for the previous year. Even given the paucity of data for such an analysis,
a trend appears.
The rates of
growth for all four quarters are declining. This does not mean that growth is
declining, but simply that we can not expect the kind of 400% increases seen
between 1997 and 1998. While hardly saturated, the advertising industry seems
to be moving into a more mature phase.
only represents the past, and the future might be different. New technologies
or new insights about getting users to respond to ads might well lead to a sharp
increase in revenues. But barring such a major change in paradigm or overall
business strategy, we believe (80% probability) that growth rates will settle
down to a point where the multiplier over corresponding quarters will be less
This is good
news for vendors of advertising software and services, although the direct effect
on their business is not large. There are still new companies to sell to, and
there are certainly many opportunities for revenue growth for the transactional
services. Over the next few years we expect more competition between websites
for vendor dollars. As a result, the vendors will compete to demonstrate the
broadest functionality and the best technology for targeting surfers with ads
they will respond to. We also believe that websites will tend to stick with
an advertising solution for at least two to three years, so that the vendors
need to capture market share now. We therefore recommend heavy investment in
Research and Development for vendors of advertising solutions.
continue to refine their advertising strategies to give advertisers more reason
to advertise. Primarily this is a question of refining content to make the site
more attractive to the users their advertisers want. Secondarily, it means getting
increasingly better at identifying the users who show up, targeting ads on an
individual basis, and delivering richer and more creative ads. Look for software
vendors who show the vision to keep improving technologies for matching ads