Net-Advertising Market Finds Its Legs

Internet advertising volume surges 39% from a year ago and the future looks bright, analysts say.
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This time around, Internet advertising isn't looking like a bubble.

U.S. online advertising sales in the first quarter of the year hit a record $2.3 billion, the Interactive Advertising Bureau trade group reported this week.

But unlike the $2.2 billion in sales reported for the industry's previous high-water mark in the fourth quarter of 2000, current growth appears to be driven by major advertisers, not venture-capital-fueled dot-com ventures.

The news confirms the bullish advertising trends reported by industry leaders such as

Yahoo!

(YHOO)

, and sets a good mood for investors attending Goldman Sachs' annual Internet conference. The gathering will be held in Las Vegas on Wednesday and Thursday.

The first-quarter figure represents a 39% increase over the year-ago number and a 3.9% increase over fourth-quarter 2003 levels. The number is calculated on the basis of first-quarter data from the top 15 online ad sellers, says the IAB.

While much of the growth in online ad sales has come from paid searches -- the IAB's members include not only Yahoo! but the soon-to-be-public

Google

-- the IAB won't be breaking out the components of online advertising's current growth until it releases second-quarter statistics.

"The business fundamentals remain solid, the technology infrastructure is advancing at a rapid pace and marketers are continuing to use the Internet for all types of marketing and promotion," said Tom Hyland, Chair of PricewaterhouseCoopers' New Media Group, in a statement. PricewaterhouseCoopers conducts the quarterly survey on behalf of the IAB.

Leading the growth in online advertising are traditional advertisers, according to research issued by Nielsen//NetRatings on Tuesday. Looking at the 12 months ended March 31, the audience measurement firm published a list of advertisers in various categories that showed the biggest growth in online ad usage over the prior year.

In the category of pharmaceuticals, Nielsen//NetRatings spotlighted

Schering-Plough

(SGP)

, which showed a 737% increase in advertising impressions year-over-year. Among consumer credit companies, credit card giant

MBNA

(KRB)

showed growth of 471%.

The Nielsen//NetRatings numbers don't indicate how much each company spent on online advertising. They also, of course, don't guarantee unstoppable trends: The biggest growth among telecom companies, says Nielsen//NetRatings, was at

AT&T Wireless

(AWE)

, which is in the process of being acquired.

The IAB number -- whose year-over-year growth represents a one-point increase from fourth quarter's rate -- is a positive, American Technology Research analyst Mark Mahaney wrote in a note Tuesday.

Online advertising continues to grow organically and increase its share of total U.S. advertising dollars, writes Mahaney. The big question, he writes, is "whether Internet advertising revenue growth can accelerate or, at least, remain robust." He forecasts that though year-over-year growth might decline a bit later this year, online advertising will grow 30% this year, up from the 20% figure for 2003.

In a note issued as a prelude to Goldman Sachs' Internet conference this week, analyst Anthony Noto says that online advertising, driven by such factors as increasing adoption of broadband connections to the Internet, will grow 25% this year, up from his figure of 21% growth in 2003 and a 16% decline in 2002. Noto has an outperform rating on Yahoo!; his firm has done investment banking for the company.

Noto says the average number of top-200 advertisers placing Net ads on a given day has tripled to 21 in the current quarter from sevven in the second quarter of 2003.

"It takes a lot to change the strategies of giants such as

Ford

(F) - Get Report

and

McDonald's

(MCD) - Get Report

," writes Noto, "but as the ability to demonstrate effective

return on investment improves, the amount of money allocated from these firms could provide a significant inflow of advertising dollars."