Online Advertising Gets Its Groove Back

Finally putting the dot-com devastation behind it, an older and wiser industry is enjoying a vigorous and long-awaited comeback

The fledgling comeback in online advertising is now an official rebound. The Interactive Advertising Bureau reports that during the second quarter, revenues jumped a better-than-expected 14%, to $1.67 billion, helped by ads on search engines and more traditional marketers piling online.

However, the really promising news is that online advertising is back in a seasonal groove. "I have been reluctant in the past to claim recovery or turnaround, but now we can clearly say we're on the rebound," says Greg Stuart, the IAB's president and CEO.


  What's so special about the second quarter? For the four years before online advertising took a plunge in 2001 during the dot-com crash, the sector had followed a steady annual ebb and flow. Christmas brought holiday shoppers online and was a great time to advertise, while the summer, when more people were at the beach or in their yards instead of holed up behind computers, was a lousy one. That's why the second and fourth quarters were the most prosperous for online publishers.

That pattern, along with profits at bellwethers Yahoo! (YHOO ) and AOL (TWX ), went up in smoke with the Internet meltdown. From 2001 to the third quarter of 2002, online ads took a steady nosedive for seven straight quarters as thousands of Internet outfits went out of business. When that well dried up, online publishers, who had been too busy cashing checks from dot-coms to bother wooing more demanding traditional advertisers, were left high and dry.

Positive signs have been accumulating since late last year, which saw an uptick during the fourth-quarter holiday-selling season. Ad sales chugged along in the first quarter of this year, with a 7% increase over the same period a year earlier. But analysts had been skeptical that the trend would last -- until the second-quarter numbers confirmed that online advertising's traditional growth pattern has finally been reestablished.


  By getting back in the groove, the industry proves that it has wised up. Although plenty of online publishers fell by the wayside, the remaining players got back in the black by figuring out what traditional marketers, from consumer packaged-goods giant Unilever (UN ) to Dutch financial powerhouse ING (ING ), want. Yahoo and MSN (MSFT ), for instance, have assigned execs to work directly with powerful ad agencies, which they tended to overlook during the boom years. Now, both portals are profitable.

Online publishers are also focusing on selling increasingly popular paid-search services. In the second quarter, paid search made up 31% of overall online ad revenues, up from 9% in the year-ago quarter. With paid search, pioneered by Overture Services in 1997, marketers pony up only when people click through ads on the search engine to the advertiser's Web site. In October, Yahoo bought Overture for $1.7 billion, while AOL has partnered with search engine Google, the other top paid-search outfit. MSN is developing rival technology.

The question now is: What shape will the online ad market take? It remains to be seen whether paid-search advertising will dominate the earlier kinds such as promotional banners and so-called rich-media ads. That will depend on whether traditional advertisers accept the idea that it's possible to build a brand online using the non-paid-search ads. Once again, it's up to the online publishers to make that case. And as grownups, they're learning the fine arts of persuasion.

By Heather Green in New York

Edited by Thane Peterson

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