There’s been a lot of banter recently here, at conferences, blogs, and in my personal conversations with people about the effect of an overall slowdown (if there is one) on Internet advertising.

The problem is, there are several, very different, and powerful forces bearing down on the Internet advertising market, which make it hard to say what — at least, in the short term — will happen with ad rates.

The biggest, and I personally believe the most powerful, is one that a lot of people ignore in the short term, but which over the last few years has driven the internet advertising market most strongly. That force is the shift of traditional advertising dollars (think branding campaigns and Superbowl commercials), as a percentage, towards Internet advertising.  This is part of what is driving the huge profits and building companies in the Internet advertising market, which is traditional advertisers starting to pay attention to this “new thing called the Internet” and dipping their toes into branding ads here and there. My belief is this is only at the very, very beginning, if you compare the vastly greater sums being spent on other media like television and even the maligned newspaper industry. Anyone who does any kind of advertising placement can tell you, you can buy Internet ads at pennies on the dollar versus what you’d pay for an ad in your local small town newspaper. This shift is happening, and is not going to stop because of any kind of economic environment.

The second force, which has also been driving Internet advertising, is the entree of a different class of advertiser. These are the small businesses, web sites, and others who would not be purchasing traditional ads on television, newspapers, or radio–but have done so fairly regularly on the Internet. These are the bread and butter of Google — the advertisers who are only spending a small amount every month, but are able to because of the low cost of getting a few impressions. I think of this as the “eBay” effect — because there’s a marketplace available, a new market has been created which previously didn’t exist. Based on the kinds of ads I see popping up on Google, these are the folks that have been driving the bulk of Google’s ad revenues.

Finally, there’s the (short term) force of any spending pullback by advertisers due to a soft economy. This can be quite significant: witness the giant pullback in spending on technology magazine ad pages during the Dot Com bust. It also will most likely result in lowered CPM for online publishers, as competition for inventory drops and there’s a lot more available ad space than willing buyers. However, if there is a recession, Internet advertising is a way to get a lot more bank for your buck — it’s much cheaper (and more measurable) to buy up Internet advertising space to sell your products.

So, if you try to measure the shift of ads to the Internet, the democratization of advertisers being driven by Google, and economic effects, I’m really not sure what you get.  The fundamental question is, what’s the overall direction the Internet advertising market will take, given these the opposing forces? In the short term, it’s pretty darn muddy, and may even be bloody as the cost structure being supporting by high CPM rates on sites gets decimated by a drop in CPMs–it may even be fatal for some web sites. But, in the long term, I think it’s clear — more Internet advertising, and most likely better CPMs as all those traditional advertising dollars see a better ROI and reach in Internet properties.  As a long term play, I think it still looks pretty good.

Filed under:
Advertising, Bubble by Benjamin Kuo