Internet advertising exceeded $17 billion in 2005. It has now surpassed billboards, magazines and cable in spending. On its current growth path, it will pass radio advertising in less than two years. The Interactive Advertising Bureau (IAB) has pointed to this growth as proof of how the Web, in addition to being a call-to-action medium, has come into its own as a branding medium.
The growth is startling – unless you were around to see how fast television became popular in the 1950s. The Internet has arrived as a major medium almost as fast as television did from 1948 to 1957 (see Figure 1).
Fig. 1: First 10 years of internet marketing household penetration
The parallels continue. While the split between all national and local advertising is roughly 50-50 for online (see Figure 2), it’s closer to 75-25 percent in favor of national, a phenomenon that was mirrored in the early years of broadcast TV when the vast majority of television advertising was national. The shift has begun, however, and local online advertising is gaining ground. The question is, will the national-local split be 50-50 for online, or will the Internet with its vast networking capabilities be more conducive to national advertising?
Fig. 2: National to local ad ratio, 2005 Copyright 2006 Borrell Associates Inc.
Fastest growing portion
Either way, local advertising is the fastest-growing portion of the online market. Since 2000, it has enjoyed a compound annual growth rate of 23.1 percent. In 2005, growth skyrocketed to 51.5 percent – and it may be just the beginning. Even at $4.1 billion for 2005, local online advertising represents only 3.1 percent of the nearly $130 billion that local businesses will spend on all media advertising. Borrell Associates projects that over the next four years local online advertising will swell to $8.6 billion – and still be less than 6 percent of all local ad spending.
With fast-paced growth comes a greater danger of incumbents losing market share. Operators who get lost in the bliss of a 40 percent gain wind up marveling at how fast their feet are moving while competitors zip past them. In this environment, market share becomes a more important goal than growth rate alone.
Interactive advertising has created an interesting phenomenon at the local level, where the competition may no longer have a local face. In the analog world, media companies based inside the market were the clear choice to deliver locally targeted advertising in the form of radio or TV commercials, newspaper ads, auto magazine listings, or direct-mail coupons. In the digital world, out-of-town companies do not need a broadcast license, delivery trucks or shelf space at 7-Eleven. In fact, out-of-town pure-play Internet firms have already captured close to 32 percent of the local market and are likely to claim even more with their foothold in the fastest-growing segments: local paid search and e-mail advertising.
Battle for dollars
The battle for local ad dollars is mainly between newspapers and everyone else (see Figure 3). Newspapers claim 41 percent of all local online advertising, while the Web sites run by other traditional competitors such as TV, radio, yellow page directories and local magazines capture 27 percent combined.
Fig. 3: Media segments competing for online advertising, 2005 * Includes both local and national publications ** Includes both broadcast and cable TV providers *** Includes both local and national ISPs Source: Ad Audit Services, Borrell Associates Inc.
Despite the size of the pie slices in Figure 4, we must note that every local market is unique. Share estimates also depend on how markets are defined. For instance, online ad spending within a smaller market comprised of just one or two counties may look vastly different than spending within an entire designated market area. (For consistency, all share estimates discussed refer to DMA market definitions.)
Fig. 4: Online advertising market shares: Total U.S. online vs. local online Sources: Dun & Bradstreet, Ad Audit Services, Borrell Associates Inc.
The race for online ad dollars is not limited to major newspaper and TV station Web sites. The gold rush has spurred other in-market competition from community newspapers, radio stations and independently operated “city.com” sites, each of which might capture hundreds of thousands of dollars in any one market. Big newspapers and TV stations are accustomed to tracking only a handful of local competitors. With the Internet’s low barriers to entry, they now face dozens of local competitors. In aggregate, the myriad of smaller sites can account for as much as 40 percent of the online ad spending in a market.
Big question
For those preparing local online ad revenue budgets, a big question always arises: How much growth should be expected? And what types of online marketing will interest local advertisers the most?
Growth is always interesting, but tracking share becomes more important in high-growth periods. And for local markets, that share can vary widely. As stated earlier, newspaper operators hold the lead in local online market share, commanding 41 percent. However, that figure includes multiple newspapers operating within a large DMA. Typical market share for the Web site of a market’s dominant newspaper in 2005 was 18.1 percent (see Figure 5).
Fig. 5: Share of local online advertising for largest newspaper Web site, by market size. Source: Borrell Associates 2005 Revenue Survey
But there are newspapers that operate Web sites that are keeping up with the momentum. Newspapers with revenue greater than 40 percent of the market’s local online ad spending share many key characteristics. They tend to have:
*Very strong executive support for their online operations
*Multiple revenue streams from various advertising formats and various advertising types (e-mail, rich media or video advertising, etc.)
*Dedicated, online-only sales staffs
*Non-traditional sales personnel (i.e., not print or broadcast salespeople converted into online salespeople)
*Less dependence on classified vertical categories
That last bullet point is an important one. The average newspaper site generates 70 percent of its online revenue from real estate, automotive and recruitment advertising – even though these categories typically represent less than 15 percent of the total online ad spending in the marketplace.
For newspapers, this focus is a natural consequence of playing to their strength in print classifieds. These revenues formed the financial foundation for their online operations and are now contributing significantly to their parents’ bottom lines. As a result of this continuing focus on protecting the mother ship’s core products, though, newspapers are leaving a lot of money on the table.
