Will The Ad Slowdown Reach The Web?

The housing boom hasn’t turned into a bust quite yet, but it is losing steam fast. In the meantime, the impact of the credit crunch is being felt in other areas of the U.S. economy, including advertising. A new report released today by TNS Media Intelligence shows that overall spending on advertising declined for the second quarter in a row.

“For the first time since 2001, media advertising expenditures have declined for two consecutive quarters,” said Steven Fredericks, president and CEO of TNS Media Intelligence. “Given the uncertainties about near-term economic growth and consumer spending, we expect core ad spending will continue to face challenges during the second half of the year.”

But the effect is far from uniform. The slowdown is having its biggest impact on traditional media — especially print — while Internet advertising is rising. Online advertising (not including search and online video ads) was up 17.7 percent during the first half of 2007.

Still, take the good news with a pinch of salt.

The two sectors that are being impacted the most by the overall economic uncertainty are automobiles and housing, both big spenders online. According to Nielsen/NetRatings, the top advertisers in the month of July were all related to the housing-mortgage business: Low Rate Source, NexTag, Experian (EXPGY), Countrywide Financial (CFC) and IAC (IACI), parent company of big-spending Lending Tree. Anne Zelenka and Silicon Alley Insider have written about the impact of this sector’s changing fortunes.

It is only a matter of time before the slowdown starts to impact some of the larger web players that depend on online advertising. As housing sales stall, that sector’s companies (including financial services firms) will slash their budgets to get in sync with market demand, which means fewer dollars for not just print and broadcast but Internet advertising as well. And those dollars will be have to be shared across many different properties — a risky scenario for some of the larger web companies.

Unlike in the late 1990s, when the online advertising options were limited to Yahoo (YHOO), AOL (TWX) and a handful of others, the market today is surfeit with Internet destinations. Social networks and social media sites are creating inventory at a rapid clip, and are one of the main reasons why the CPMs (cost per 1000 impressions) have stalled. (That is the real reason why AOL’s revenue numbers blew up recently.)

Dave Morgan, chairman of online advertising firm Tacoda, brought up this issue in back in August.

…many advertisers and agencies are now shifting their display ad buys from higher-priced contextual pages on branded destination sites to much lower-priced inventory aggregated by networks and targeted to users on social networks, small, “long tail” sites, and on non-contextual pages of larger web sites.

AOL is buying Tacoda to get more targeted and boost its CPMs, but the problem of too many destinations for too few dollars remains. Listen for what the big boys of online display advertising — Yahoo, Microsoft (MSN) and AOL — have to say about it when they announce their third-quarter results.

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