This is a Series on Online Advertising. Part 1 was an Overview of Keywords and a Macro and Micro-Level Landscape of the Sector.
Part 2, published today, is a Market Description of the Online Advertising Industry, with a Focus on Paid Search and Online Video Advertising Sub-Categories.
1) Market description
Suffice to say that distribution on the Web is very different than distribution in manufacturing, retail, or for that matter, offline media. Furthermore, it is important to note that the digital, personalized nature of the World Wide Web changes the nature, definition and context of local, national and international.
In other words, when estimates refer to “local” market, they rarely refer to a business’ local market but rather the sum of all of your audience’s local market because content and advertising can be targeted to everyone given where they are located.
Furthermore, it is very important to note that advertising should be seen as a matrix. You can have types of advertising such as video, search, display that are spent at either of a local, national or international level. Clearly when we look at far-flung estimates, there is an element of overlap.
:: Background/Introduction: Size of Internet Population
The world’s population stands at over 6.5 billion people, with China (1.3 billion), India (1.1 billion) and the USA (300 million) leading the way. The Internet has existed since the late 1960s and when Tim Berners-Lee invented the world wide web in the early 1990s, communications and commerce changed forever.
When ranked by continent, Asia leads the way with Internet users, at 389 million, followed by Europe with 313 million and North America, with 232 million. In terms of penetration, North America leads the world with nearly 70% reach. Clearly, the USA leads the world with 207 Internet users, with China in second place with 132 million users.
a. Local
Total online and offline local advertising is a $100 billion market, according to analyst Greg Sterling of researcher Sterling Market Intelligence. This includes local newspapers, local radio, local Web sites, local TV, Direct Mail, billboards, etc.
When we look at local advertising, the component of interest is mainly local paid search advertising, which is a very small, but rapidly growing, subset of all local advertising, according to Borrell Associates. Paid local search is expected to remain the fastest-growing ad category, nearly doubling to $1.8 billion and accounting for almost a quarter of local online ad spending. Local e-mail will climb by 54 percent to $233 million, while local banners and listings will increase 18.4% to $5.6 billion. By 2010, local search and e-mail are forecast to comprise half the local online ad market. But the report predicts an overall flattening or decline in local online ads in four years as the category approaches $10 billion.
“Things can’t go on this well forever,” said Borrell Associates President Gordon Borrell. “We’ve had double-digit growth for the last eight years, so it has to slow down at some point.” For now, the growth in local Web advertising is spurring more hiring. The study estimates a 37 percent increase in online-only salespeople this year and expects the hiring boom to continue into next year. Already, the largest local sites now have three to four dozen online reps.
Another estimate of local Search pegs the market to represent a $3.4 billion market in 2010 (Kelsey Group).
b. National (US)
Total Advertising
Given that Mojo Supreme’s audience is mainly US, the National market description is that of the US.
McCann Worldgroup, a unit of the Interpublic Group of Companies, forecasts very divergent forecasts for traditional and new media. For example, ad spending at newspapers is estimated to grow 1-2%. Ad spending at the four largest national broadcast television networks would increase just 3% from 2006 to 2007. The Web, however, was estimated to grow at least five times faster, at 15%, according McCann Worldgroup.
Overall American ad spending in 2007 would total $298.8 billion, up 4.8% from $285.1 billion in 2006. It should be noted that this estimate does not include search engine marketing in estimates for Internet ad spending, classifying it as more promotional in nature. Regardless, McCann Worldgroup expects online ad revenue to grow at “seven times the rate for traditional ad growth.”
Another forecaster who does include it within his online totals — Steve King, worldwide chief executive at ZenithOptimedia, part of the Publicis Groupe — offered a prediction that Internet ad spending next year would grow 29 percent from 2006.
Online Advertising
According to McCann Worldgroup, Internet ad spending as a percentage of the total for all American media will reach 7.1% in 2006 and 10.4% percent in 2009. Using the $285.1 billion figure for total American advertising, and the 7.1% share for Internet advertising, then this pegs the size of online advertising at $20.2421 billion, and this excludes paid search.
Other, more conservative estimates remain just as buoyant. In early 2006, PriceWaterHouseCoopers pegged 2006 online advertising as a $15 billion market, set to grow faster than print, TV, radio and billboards between 2006 and 2010. eMarketer projects 2010 online advertising to represent a $25 billion market in America, while Morgan Stanley issued a more bullish $32 billion figure.
In her report for Morgan Stanley, Mary Meeker predicted the Internet could grab 13% of about $243 billion in total U.S. ad spending in 2010, compared with 7% or $13 billion, of $192 billion in 2005 ad spending. Internet advertising will continue to take dollars from traditional media, as spending triples online but grows slower or stagnates on television and in newspapers.
The growth will be supported by increasing crowds of American Web surfers — rising at 3 percent a year, to an estimated 229 million by 2010. As online advertising targets those users more effectively with better, more measurable returns, advertiser budgets will migrate in greater numbers to the Web.
By category, Meeker sees search advertising growing 25 percent a year to $15.8 billion, accounting for 50 percent of total U.S. online ad spend, compared with $6.7 billion, or 42 percent, today. The analyst’s figures assume Yahoo’s much-anticipated upgrade to its search and advertising platform performs as expected.
Display ads will make up 20 percent of ad spending, or $6.2 billion, compared with 26 percent, or $3.1 billion today.
The analyst predicted rich media advertising will grow 26 percent each year to $3.2 billion in 2010, and account for 10 percent of ad spending. (Advertisers will spend $1.1 billion, or 7 percent of their budgets, in the nascent medium in 2006.)
We are purposely highlighting the very different estimates seen these days for Web spending. Clearly, the market is growing but even the experts have a hard time “wrapping their hands” around the size and scope of the shift of ad dollars from offline to online. One thing is clear, online advertising is a booming industry. Eight years after launching, Google has scaled to become a company with a market capitalization of $150 billion, with $10 billion in cash. At its current growth rate, and given Microsoft’s stalling growth rate, Google could surpass Microsoft’s market capitalization by 2010. We’re not saying that it will happen, we’re just saying judging by the companies’ financial performance and the estimates for growth in the respective markets, it sure does seem like it will happen.
To simplify the categories, online advertising categories include:
- Paid search
- Display/banner
- Classifieds/listings
- Online advertising (marked rich media in eMarketer’s graph)
- Sponsorships
In light of operating search and video properties, we’ll examine these primarily.
The Search Engine Industry
:: Search
Search is the most popular activity online after email.
Most websites (over 85%) are found through search, be it – in the words of John Battelle, author of The Search - recovery (everywhere you’ve been before and might want to go again) or discovery (all that you may wish to find but have yet to encounter).
Before the advent of text ads alongside search engines’ organic results (organic results being the results within the search results set, and not the ads on the side), search engines generally yielded:
65% click-through rate (CTR) to the top organic search result,
20% CTR to the second result,
10% CTR to the third result and
the remaining 5% CTR to the other results.
When companies like GoTo.com (which rebranded to Overture, and was acquired for $1.5 billion by Yahoo! in 2003 and is now known as Yahoo! Search Marketing), Google and others began to display paid text ads alongside organic results, then these paid text ads began to claim anywhere from 1% to 30% CTR away from the organic search results.
It is these clicks that generate the billions of dollars of online advertising revenue that go to Google, Yahoo!, Ask Jeeves etc.
[Editor’s note: I removed a large excerpt here that outlines some confidential items. Hopefully it does not make any of the following unclear.]
:: Paid Search
Paid search has proven to become the most lucrative sub-component of the entire online advertising industry.
Yahoo! and Google are the undisputed leaders in the space. In Q3, 2006, $1 out of $4 spent on online advertising in the US went through Google. Google, in turn generated 99.9% of its total revenue from paid search. This manifests the power of paid search in the advertising economy. It’s interesting to note that Google’s revenue has been nothing short of spectacular:
- 2002 revenues grew 409%
- 2003 revenues grew 234%
- 2004 revenues grew 118%
- 2005 revenues grew 92%
- 2006 revenues grew 67%.
The purpose of pointing that out is to highlight the torrid growth of paid search, as Google has been its leading precursor and beneficiary.
Depending on which research group you ask, the numbers vary. What does not vary is the overall, general trend: which is upwards, rapid and steep.
According to eMarketer, paid search will double from $5.125 billion in 2005 to $10.28 billion in 2010.
According to Jupiter Research, paid search will rise from $4.2 billion in 2005 to $7.5 billion in 2010.
In 2006, powered largely by Google’s impressive financial results, estimates for paid search grew further: Morgan Stanley estimated the 2010 figure to be $12.8 billion.
These numbers are for the US market. While search will continue to grow, it’s important to realize that it is a far more developed marketplace than video, which we will examine next.
A Deeper Look at the Online Video Industry
TV advertising is a $75 billion industry and remains the largest one. There is a lot of debate about the size of online video advertising and TV advertising in 3 to 5 years. The general assumption or conclusion is that some amount of advertising budgets will shift from TV to the Web, where marketing is more effective and efficient.
Online Video Categories
Online Video Advertising represents the next major opportunity. While online video has made a lot of noise, it is important to distinguish between the sub-categories:
1 - content management system (CMS) platform technology companies (Brightcove)
2 - advertising creation and management companies (Klipmart)
3 - content aggregation and distribution (ROO)
4 - video file hosting and sharing (YouTube, Revver, Guba)
5 - video content editing (Adobe’s Macromedia/Flash, Jumpcut)
6 - content producers (Our own WatchMojo.com)
7 - content delivery network, or CDNs (Limelight, Akamai)
Venture Capital Interest Rising
The online video industry is still largely nascent: 27 online video companies secured $126.7 million in financing in 2003, 23 secured $121 million in 2004, and 37 companies secured $160.7 million in financing in 2005 (Thomson Financial). However, in 2005, the entire U.S. venture capital industry invested $20 billion in 3,000 new companies, so only 5.3% of that was invested in online video. Furthermore, most of first wave of interest has been in online video technology platforms and file sharing sites like YouTube. There were, in 2006, at least 200 YouTube “clones.” Clearly the market for file sharing video sites was saturated, and many of these lacked content or advertise-able content. In other words, the bulk of content found on YouTube was a) user-generated content that advertisers generally shun or b) copyright-violating content that advertisers cannot advertise alongside.
When Google acquired YouTube for $1.65 billion in stock in October, 2006, it made it very hard for other file sharing sites to gain traction. Overnight, Google was the number one player in search and video. Audiences would now flock to YouTube and content providers would look to YouTube mainly/predominantly as the distribution partner of choice.
Online Advertising
Online advertising is moving very quickly, from 2004 to 2006, the projected estimate for the online video advertising market grew from a slated $657 million in 2009 to $3 billion in 2010:
An estimate of the online video ad market for 2009 - set in 2004: $657 million
An estimate of the online video ad market for 2009 - set in 2005: $1.5 billion
An estimate of the online video ad market for 2010 - set in 2006: $2.3 billion
An estimate of the online video ad market for 2010 - set in late 2006: $3 billion
The reason is simple: the Web and video are natural fits. The success is not on YouTube alone, which streams 100 million daily videos per day. It’s not just YouTube, the entire Web has caught the video bug: 24% of surfers watch online video at least once a week, 46% watch at least once a month (Online Publishers Association).
Video is far more embryonic than search. While search has blown many people away and become a $5 billion marketplace five years after the pay-per-click model took off, it is still poised to double to $10 billion by 2010, in the US alone.
Video, with much more upside possible (given TV’s $75 billion advertising budgets in the US) stand to be a $3 billion marketplace in the US by 2010, one third of the size of the search industry. Of course, much the same way that search ended up becoming much larger than we expected at the onset of 2000, it is safe to assume that online video could funnel far more revenue from TV than expected and become a larger sector than search.
General Trend
Much the same way that we expect print advertising to flow (as it has done considerably from 1994 to 2007) from newspapers and magazines to the Web, the prevailing wisdom is that money will flow from one (TV) to the other (Web). Gordon Borrell, chief executive at Borrell Associates estimates that “10 years out, many newspaper Web sites could be as large as the newspapers that spawned them” in terms of ad revenue.
Classifieds
Online Classifieds are set to grow from a $2.6 billion market in 2005 to a $4.1 billion by 2010 (Jupiter Research). Classifieds remain an interesting category because the most successful strategy has be to remain a free service and generate advertise by conventional advertising (display, text search etc.). One such case is Craigslist.org, far and away the largest free classifieds service online.
c. International
In order to adapt the outline of this business plan to reflect Mojo Supreme’s business reality, we should clarify that on the Web, businesses need to be either extremely local, or extremely global. In other words, either your content is literally for the reader in a given market (almost hyperlocal), or it’s market-agnostic and anyone should be able to identify with it. As such, when we look at sizes of international markets, it’s to compare the relative sizes of advertising markets in each country.
Some estimates to put the relative markets in perspective:
By 2010, the US online advertising market will be somewhere between $25 and $32 billion per year. The Asian is set to be a $110 billion one, on the strength of China, and to a lesser extent, India and Japan. The same PriceWaterhouseCoopers that pegged the Asian market at $110 billion suggested that the US ad market online would be $60 billion in 2010.
These varying estimates clearly show that while online advertising is booming, no one can clearly wrap their arms around the size of the market and overall opportunity before us.
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