While the economic downturn will impact all advertising media, digital advertising is in a relatively strong position to ride out the worst of the storm. However, while, in aggregate, digital advertising will continue to take market share the dynamics of the distinct sub-segments (search, classified and display) will be very different and effective monetisation for traditional media companies will not be straightforward. By Tabitha Elwes, partner at Value Partners, London.

1. PERSPECTIVE
Online advertising - Opportunities for media owners
While the economic downturn will impact all advertising media, digital advertising is in a relatively strong position
to ride out the worst of the storm. However, while, in aggregate, digital advertising will continue to take market
share the dynamics of the distinct sub-segments (search, classified and display) will be very different and effective
monetisation for traditional media companies will not be straightforward.
Online Advertising has been one of the growth stories of the last three years, but
Tabitha Elwes
with a looming recession and major reductions in advertising spend how is the
Partner
online sector going to be affected?
In 2000 to 2002 Internet advertising was heavily impacted by the economic slow-down with revenues falling 16%
compared to 5% in non-internet advertising1. This time, situation is likely to be different.
• First, in 2000 online advertising was not well understood, constituted a tiny percentage of budgets and
was considered peripheral, an easy target for cost-cutting.
• Second, the hype around the benefits of internet advertising was greater than its ability to deliver –
today, increasingly sophisticated infrastructure, measurement and accountability, coupled with a shift
in consumer behaviour, have made online activity core to most marketing plans.
• Third, in a downturn media spend increasingly focuses on value and proven returns. The internet will have
some protection due to its transparency, accountability and value for money.
While 2009 is unlikely to see the double digit growth of recent years, it is realistic to expect some growth and that
online will continue to gain share at the expense of other media.
Divergent trends within online
The relative resilience of online advertising masks divergent trends between sub-segments. To understand how
this will manifest itself, it is important to understand the evolution of online advertising.
Exhibit 1: Total European online advertising - category share (%)
Display
Paid search
60% Classified
40%
20%
0%
01 02 03 04 05 06 07 08
Phase 1 Phase 2 Phase 3
Source: Jupiter
Phase 1
Initially, phase 1 centred on banner advertising and classifieds. Early adopters of banners were advertisers of
‘considered purchases’ (e.g. cars and travel) or electronically delivered products (e.g. financial services) focussing
on direct response and calls to action. Their priority of reach was achieved by advertising on major portals. Online
classifieds were adopted by segments such as recruitment and focused on directory sites and verticals.
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2. PERSPECTIVE
Phase 1 saw the growth and early dominance of paid search, driven by Google (who control over 70% of UK
search). The transparency and cost-effectiveness of search attracted new advertisers, mainly small businesses,
and was used by major brands to enhance traditional media (e.g. Cadbury buying Gorilla keywords to support its
TV campaign). It is a long tail business.
Phase 2
The rise of social networks had a huge impact on online advertising. It significantly increased the quantity of
undifferentiated inventory and helped polarise the market between premium and remnant advertising. The
expanding market exerted downward pressure on ad prices, particularly on low-end, commodity. Early attempts
by social networks to leverage increasingly sophisticated behavioural targeting, highlighted a number of concerns
about privacy and negative consumer reactions to ‘big brother’ style technologies.
Exhibit 2: Split between Premium and Remanmant Advertising
Premium
• High CPM
Value
• Quality content
• Targeted audience/ context
• Longer user engagement
• Relationship-driven sales
Remnant
• CPX or low CPM
Volume • Automated sales by networks
• Use of targeting technologies
• Volume / low margin
• Aggregation for scale
Phase 2 saw a rise in the number of major brand advertisers (e.g. FMCGs and retailers) integrating online into
their marketing plans. With the entry of these players came new advertising techniques, such as engagement
marketing - sophisticated online CRM campaigns designed to enhance brand loyalty by creating new models of
consumer engagement, often using functionality and targeting user groups delivered by the social networks.
Phase 3
Phase 3 is expected to see a number of significant developments
• First, the internet will become a more viable platform for brand-building with the coming of age of
brand-building formats, such as online video, and the increase in online television consumption.
• Second, advertisers and media buyers are expected to adopt ever more sophisticated behavioural
targeting models, driving technology uptake and the value of targeted inventory.
• Third, rising understanding of the benefits of linked offline and online campaigns, will lead to the
creation of integrated functional teams, on buy and sell side, to enable seamless execution of cross-
platform campaigns.
We are also likely to see large international players, especially technology platforms, seeking to become one-stop
shops. They will offer a wider portfolio of services to advertisers, covering search, display, behavioural and other
targeting services, planning and publishing. The importance of scale is already driving aggressive M&A activity,
enabling the likes of Google and Microsoft to become the founder tenants of intricate advertising eco-systems.
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3. PERSPECTIVE
Exhibit 3: Online advertising eco-systems have started to emerge
Advertiser
Agency Technology
Ad sales Web
house publisher
As the advent of phase 3 coincides with the economic downturn, growth will slow. This will affect different segments
in different ways,
• While growth in search is slowing, it is relatively protected by its position as a high value, low risk product,
and its competitive advantage as a direct response tool.
• Display will be more affected as heavy users of online (e.g. finance, automotive) will be disproportionately
impacted by the down turn and advertisers may reduce experimentation particularly in brand building
where online remains unproven.
• Premium display is likely to be more protected than run-of-site and remnant inventory, as advertisers migrate
to quality.
• Classified advertising is also likely to be hit hard, particularly by the downturn in the property and recruitment
markets
However, relative to other media online will continue to outperform.
Opportunities for media owners
With declining share in traditional advertising, media owners need to optimise their approach to online while
recognising it is unlikely to deliver. We believe, three factors will be key: scale, quality of audience, and service
level. Those companies that are able to adapt to serve the needs of increasingly discriminating advertisers, will
emerge all the stronger from the downturn, while falling asset prices are likely to present attractive opportunities
for acquisition and partnership.
Exhibit 4: Key success factors in online advertising
+ • Building sufficient reach to be amongst top sales
points to compete for campaigns
Scale • Building critical mass to sell in key verticals
Importance
• Qualifying traffic to segment inventory
- increasing “quality” of sites and content
Quality - increasing qualification of traffic (behavioural
targeting, vertical led sales)
- … whilst maintaining price / value
• Focus on execution competencies
- ad serving, account management, service and
Service solution provision
• Best practice approach to technology
- - targeting, tracking, measurement, analytics
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4. PERSPECTIVE
For traditional media buyers there may be opportunities to leverage two important drivers of the next phase of
growth: increasing cross media planning and implementation and the rising importance of long form professional
video content on broadband networks.
Exhibit 5: Key success factors in online advertising
• Video still nascent (6% of display) reaching ~20% in
2012
• Advertisers value professional video highly
Video - $50cpm v $0.3 for UGC
- Engagement much deeper / longer
- Scarce, but growing in popularity
• To date, limited to multi-platform sponsorship and
discounted bundling
Cross media • In future, greater demand likely
- integrated media planning
- co-ordinated media buying
- partial merging of media – e.g. TV ads run online
Source: JupiterResearch, Spectrum Value Partners analysis
However, even with effective focus on these areas the economics of online will almost certainly require an approach
incorporating multiple revenue streams rather than sole dependence on advertising.
About Value Partners helped build and consolidate For more information on the issues
Value Partners’ corporate raised in this note please contact
Value Partners is a global reputation and brand. Value tabitha.elwes@valuepartners.com or
consulting firm comprising two Partners assists clients mainly one of our offices below.
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