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Why the Advertising Outlook Remains Bleak

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Don't expect any miracles, online or off.

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Advertising has a greater impact on the web than it does in traditional media, but that's still not resonating with ad buyers. Advertisers devoted only about 10% of their ad dollars to the Internet in the first half of 2009.

Citi researchers say 43% of online users remember the brand compared with 15% for offline advertising, and 33% of online users recall the message compared with 11% for other types of advertising.

The legacy media -- print, broadcast TV, cable, and radio -- continue to deliver large but diffuse audiences. This raises a basic question: Are advertisers paying for eyeballs they don't want to reach?

Maybe, but outside of search ads on Google (GOOG), Yahoo (YHOO), or Microsoft (MSFT), it appears that advertisers are reluctant to spend heavily on up-and-coming websites that aren't widely known. This may suggest a shakeout ahead, but the Internet's low cost may allow marginal players to stay in the game longer than their traditional counterparts.

So, don't look for large, sudden changes in the Internet paralleling February's closure of the Rocky Mountain News, a newspaper published in Denver.

Advertising is in a funk, reflecting the downbeat economy and rising unemployment. This isn't rocket science: No ad, no matter how clever, can convince people to spend if they're fretting about job security.

A study by PricewaterhouseCoopers says Internet advertising revenues totaled $10.9 billion in the first half of 2009, a decline of 5.3% from the same period a year ago.

The bright spot: Search advertising, which grabbed 47% of the advertising in the first half of 2009 compared to 44% in the first half of 2008. That makes sense because the ads are keyed to user interests, allowing advertisers to reach a defined audience.

Video and banner ads were up slightly, but display, sponsorship, classifieds, and referrals fell, PricewaterhouseCoopers said.

The Internet Advertising Bureau, representing about 375 media and technology companies that sell about 86% of online advertising in the US, expects more advertisers to embrace digital media's "accountability," or ability to track who sees and responds to ads.

But there will be no immediate miracles: This year is likely to see further declines in advertising and any rebound in 2010 will be anemic.

Worldwide, PricewaterhouseCoopers sees a 3.9% drop in digital advertising in 2009 followed by a 0.4% increase in 2010. Overall, PricewaterhouseCoopers expects the market to grow 2.7% compounded annually through 2013.

That's not the best of all possible worlds, but it beats the anticipated 15% drop in radio advertising this year and 12% decline in second-quarter broadcast TV advertising. Cable TV advertising edged up 1.6% in the first half of 2009, the lone bright spot in legacy media.

The rate of decline may slow in the second half of 2009, but it's too early to say if the market is rebounding. Don't look for encouraging signs of life in any advertising sector until the economy recovers, and with the US unemployment rate at 9.8% in September as another 214,000 people lost their jobs, many people will be holding on to their wallet.
No positions in stocks mentioned.
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