Online Advertising's Money Trail

Sarah Lacy

Look no further than Google's $190-plus share price or FastClick's $75 million first round of venture capital to see how scorching online advertising is and how desperate investors are for a slice of it.

Yes, it's old news to say that e-commerce is in vogue again and those early promises of the Internet are finally coming to pass, but that doesn't make it any less true. And online advertising is set to have another big year in 2005. So investors with dollar signs in their eyes may be wondering: Where is this torrent of advertising dollars going, exactly?

A new study by Avenue A/Razorfish, the largest buyer of online advertising, shows some interesting trends beyond the usual "paid search is hot" and "branding is taking off" we heard throughout 2004.

We all know the big portals can demand the highest premiums, but the research shows that Web sites focusing on specific areas like sports, healthcare or finance are huge pools of profits too. Out of 654 sites Avenue A/Razorfish bought ad space on in 2004, 352 were in such verticals. By far, travel sites won the most business, with 32% of ad dollars. No surprise there.

But apparently, no one wants to reach people like me. The two categories I visit the most, sports and finance, were the two laggards, getting just 5% and 2% of ad spend respectively. And they were two of the slowest growers in 2004 at under 5% each. That could be because the cost of running an ad on sports and finance sites can be twice as expensive as sites in other categories, says Jeff Lanctot, Avenue A/Razorfish's vice president of media. Meanwhile health was the no. 2 category—I don't think I realized there were such Web sites but apparently low carb devotees are glued to them.

Tech sites, too, charge a premium, but advertisers are increasingly biting. It only got 7% of ad dollars but was the fastest grower from 2003 to 2004 at 46%. Entertainment was the second fastest growing category with a 38% increase in ad dollars. Anyone who's visited a Web site in the last year and been inundated with movie trailers shouldn't be shocked at that.

So where are the biggest opportunities for young sites going forward? Lanctot expects travel to tail off. And sports may be ripe to grow, but top sites ESPN, Sports Illustrated and CBS Sportsline will be hard to dislodge. New entrants may look at the broad "lifestyle" category, which got 9% of ad dollars in 2004, up just 3% from 2003. There’s room to grow, prices are reasonable and it's broad enough that new sites can stilly jockey for top position.

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