Advertising Revenues Grow and Grow but Slower and Slower

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Event Summary

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.

Market Impact

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:

Fig. 1

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:

Fig. 2

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.

However, there 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.

Fig. 3

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.

Trend analysis 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 than 1.8.

Vendor Recommendations

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.

User Recommendations

Websites should 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 to individuals.

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