Growth of online ads hits high speed

By Jon Swartz, USA TODAY

SAN FRANCISCO — Demand for online video ads by Ford Motor, Colgate-Palmolive and others will contribute to a breakout year for online advertising in 2005 — and spell trouble for newspapers and TV, financial analysts say.

A surge in text ads on search sites Google and Yahoo — combined with more high-speed Internet users — also will help push online ad spending over $10 billion for the first time, analysts say.

It would mark the second-consecutive year that online ad spending in the USA improves 20%. The last medium to grow that fast was cable TV from 1988-90, says analyst David Hallerman of researcher eMarketer.

Entertainment, drug and auto ads are among the fastest-growing segments, says a Goldman Sachs report. It says online ads are becoming a "permanent component" of major ad campaigns — a distressing development for older media.

"The online market could have phenomenal growth doing nothing more than taking revenue from newspapers and TV," says Royal Farros, CEO of MessageCast, a developer of online news alerts.

Newspaper circulation woes will continue in 2005, says a Merrill Lynch report. And cuts at major advertisers Sears and Kmart "could take their toll."

This year, online ads will make up 4% of the overall U.S. ad market, up from 3.5% last year, eMarketer says. Behind the breakneck growth:

•Paid searches. Google and Yahoo lead in targeted text ads that appear next to search results. Advertisers love it because they pay only when a consumer clicks on the ad, and they can easily collect information about consumer habits. Traditional media require upfront fees and take longer to process consumer data.

"Sponsored search has become a staple of major ad budgets," says Ted Meisel at Yahoo, which has deals with Hewlett-Packard, Office Depot and others. At Google, more than half of revenue — about $400 million during its quarter ended in September — came from advertising on Google.com.

•Big online audiences. Yahoo and America Online average a daily audience of about 35 million people — dwarfing the top-rated network TV shows. But they charge up to $300,000 for 24 hours.

When there are rare opportunities to reach a mega-audience in the highly fragmented TV market, they are costly. This year's Super Bowl broadcast commands $2.4 millionper 30-second spot.

•High-speed. More than half of Americans online now use fast broadband connections, says Nielsen/NetRatings. That has led to more visual ads.

Although advertisers are smitten with the Internet, they aren't ready to ditch TV. Allstate this month launched an online ad campaign to complement TV ads on 24, Fox TV's series.