• HEARD ON THE STREET
• FEBRUARY 17, 2009

Future Shock for Internet Ads?

By MARTIN PEERS

What does the Internet display-ad market have in common with Zimbabwe?

Both are printing nearly-limitless amounts of their main currency, vastly diminishing its value and undermining their future. The currency, for Web sites, is their ad inventory. And while Zimbabwe, under different management, can change course, the same isn't true of the display-ad market. Web sites keep generating new content and extra pages on which ads can run.

That is why the sudden sharp weakness in online display advertising, which hit fourth-quarter revenue at companies ranging from

Yahoo to Time Warner's AOL and New York Times Co., isn't just about a cyclical downturn caused by the recession.

Associated Press

Yahoo company headquarters is seen Tuesday, Jan 27, 2009, in Sunnyvale, Calif.

For sure, part of it is due to depressed demand among advertisers, including those who buy "brand image" ads that suit the display format. AOL, for instance, whose display revenues fell 25% in the quarter, cited "softness" in categories such as "personal finance, technology, autos and retail," which clearly relate to the economy.

But weak demand is simply highlighting the more fundamental oversupply problem -- and pressuring prices. The cost per thousand views of display ads on big Web sites sold through ad networks -- rather than sales forces of individual sites, which usually handle premium inventory -- fell 54% in the fourth quarter compared with the year earlier, estimates PubMatic, which offers online services to publishers.

Conditions are getting worse. IAC/InterActiveCorp, which sells ads on sites like Evite and CollegeHumor.com, said earlier this month that display revenues were down nearly 50% in January.

If declines of anything like that rate hold through 2009, much of the Web is in for a tough time. Display accounted for about one-third of total Internet advertising as at June 30, according to the Interactive Advertising Bureau, even though it has grown more slowly than search for some years. Search advertising, dominated by Google, accounted for about 44% of the total.

Indeed, the Web is likely heading for a shakeout on a scale unseen since the dot.com bust. Those that could struggle include newspapers or magazines still trying to establish a strong online brand. Midtier Web sites -- such as closely held Digg Inc., which drew 7.2 million unique U.S. visitors in January, according to comScore -- also could find the going gets harder. Digg says it has seen no impact from the slump and expects to turn profitable this year. Yahoo's network of sites attracted 146 million unique U.S. visitors in January, by comparison. Such scale can still be a draw for big advertisers.

There is hope. Over time, as marketers increase their online-ad spending, which is still less than one third of that spent on TV, demand should pick up. Better performance-based display ads, which allow advertisers to figure out the return on their investment, also should help.

But that leaves the inventory problem, partly caused by the explosion of user-generated content. Solving that would require another Internet revolution.

Write to Martin Peers at martin.peers@wsj.com

Printed in The Wall Street Journal, page C10