Online advertising will balloon in the coming years, becoming bigger than all advertising media except direct marketing by 2012, according to IDC.
Spending in U.S. online advertising will double from US$25.5 billion in 2007 to $51.1 billion in 2012, along the way climbing up from the fifth-largest to the second-largest ad medium and dwarfing newspapers, cable and broadcast TV, IDC said Friday.
Overall spending in U.S. advertising is expected to decline by about 7 percent this year compared with 2007, which means that online advertising is fueling its growth with ad dollars previously destined for "old" media, said IDC analyst Karsten Weide.
"The big story here is that Internet advertising is growing strongly at the expense of traditional media," Weide said. "Old media ad budgets are getting moved online."
The compound annual growth rate for U.S. online advertising will be almost 15 percent between 2007 and 2012, three-and-a-half times faster than the overall ad market, he said. Although this growth represents a slowdown from previous years, it is still impressive compared with the overall ad market and considering current economic challenges, Weide said.
The reason for this reallocation of ad budgets to the Internet is that marketers are becoming increasingly convinced that online advertising is generally more effective, because it can be more precisely targeted to audiences and because it's easier to track its return-on-investment, among other reasons, he said.
In particular, marketers will take advantage of emerging formats like online video, which will see its ad spending shoot up sevenfold from $500 million in 2007 to $3.8 billion in 2012, a compound annual growth rate of almost 50 percent for that time period.
The very fast growth of online video advertising will be one of the most interesting developments in the market in the coming years, Weide said. Right now, no one rules in online video advertising, so it's an opportunity up for grabs, he said.
Although Google's YouTube is by far the largest streamer of online video clips, it hasn't been able to translate that into a comparably large revenue flow. This is because most of YouTube's content is generated by individual amateurs, and large brand advertisers are generally distrustful of associating themselves with videos that are often unprofessional and of questionable taste, he said.
YouTube's monetization problem isn't likely to improve soon, and in the meantime sites like Hulu.com, which focus on professionally produced TV and movie content, are in a much better position to take advantage of online video advertising, Weide said.
Factors that will boost online video advertising include an increase in broadband access, faster connections, the availability of more "premium" content and viewers' embrace of the medium's flexibility to pick what they watch and when, according to IDC.
Meanwhile, search advertising will continue as the single largest format for online advertising. Search advertising is currently dominated by Google with about 70 percent of the U.S. spending, IDC said.
Earlier this month, the Interactive Advertising Bureau (IAB) reported that U.S. online ad spending increased 26 percent in 2007 over 2006, and that the Google-dominated search format not only remained the market's largest, but also increased its share of the overall pie.
Search advertising accounted for 41 percent of the $21.2 billion in U.S. online spending last year, up from 40 percent in 2006, the IAB said. In 2007, spending in search advertising grew 30 percent over 2006.
Mobile Internet advertising hasn't taken off as had been expected, but it will also grow very fast, from a small base of about $50 million in 2007 to about $890 million in 2012, a compound annual growth rate of about 79 percent, Weide said.
With highly optimistic reports like these about the expected continued growth in online ad spending, the sense of urgency likely grows among companies like Microsoft, AOL and Yahoo, all of which have so far failed to capitalize as much their investors and executives have expected on online advertising's growth in recent years.