Online Ads: Goodbye to Real Growth?

SAN FRANCISCO -- Google(GOOG) and Yahoo!(YHOO) built their entire fortunes on the promise of a global move into online advertising.

But a sluggish economy has exposed the vulnerability of that very revenue stream -- and raised some doubt as to whether the growth levels the industry once enjoyed will ever be realized again.

Most observers agree that the dwindling wealth now seen in online advertising is a temporary byproduct of the housing crisis and high gasoline prices, which have curbed consumer spending as well as marketing budgets. Internet display ads, especially, have been hard hit as the concept of branding seems more like a luxury than a necessity when money is tight.

An economic recovery, however, provides no guarantee that revenue from online advertising will reach its former heights. Sanford Bernstein analyst Jeffrey Lindsay, for example, offers an optimistic scenario of annual online ad growth of 12% four years from now, which is still well below the 40% growth in global revenue the industry saw in 2006.

His pessimistic scenario, which assumes a deepening housing crisis, has year-over-year growth slowing to 10% in four years.

Nonetheless, Lindsay remains upbeat about online advertising and expects to see high and persistent growth rates online despite a significant slowdown of businesses' total advertising spend, which also accounts for traditional mediums like newspapers and TV.

"It is the switching of advertising dollars from off line to online that continues to give the online sector such high resilience," he wrote in a recent report.