Why Online Ads Are Weathering the Recession

In most media, 2009 will bring unkind cuts, and Madison Avenue will never be the same. But Internet advertising seems to be holding up

By Jeffrey F. Rayport

It hardly matters what sector of the economy you're in—it's none too soon for 2008 to be over. In the advertising business, the pain has proved especially acute, compounded by the latest estimates of where ad budgets are heading in 2009.

Just last week, Barclays Capital (BCS) lowered its projections for U.S. ad spending to a negative 10% next year and a positive 1% in 2010. Every one of the traditional media platforms is getting hit, with newspapers (no surprise) taking the brunt of the pressure, with a drop of 17%, followed by TV (minus 15.5%), magazines (minus 15%), and radio (minus 13%). While other researchers aren't offering prophesies quite so dire, one thing is clear: This is already no typical ad recession. In 1991, ad spending dropped a mere 1.9% from the prior year, while in 2001 it fell only 6.2%.

The only bright spot this time is online advertising, which, despite a series of downward revisions, is still expected to grow between 6% and 10% next year over 2008 levels.

Radical Restructuring

We already know that Wall Street and Detroit will never be the same. Radical structural changes in financial services this year have unfolded at a breathtaking pace. Now, it looks as if we may add advertising to the short list of industries that will emerge from this recession altered in dramatic ways, and for good. The harbinger of advertising's radical transformation is the sustained growth of online.

Remember that the last recession knocked online advertising for a loop. The Interactive Advertising Bureau (IAB) reports that Internet advertising was down 12% in 2001 and 16% in 2002. It wasn't until 2004 that online surpassed spending levels reached in the medium's peak year of 2000. But during the current recession, online is holding its own, and traditional media are taking the hit. Indeed, a survey of 400 senior-level marketing decision-makers, released last week by PermissionTV, confirmed the view that digital marketing would be the least affected by budget cuts among all major commercial media.

So why is this time around for online advertising different?

For starters, online has come of age as a medium since the early 2000s. IAB President Randall Rothenberg observed recently that in a typical recession, "above-the-line dollars [move] below the line." When budgets are tight, pay-as-you-go approaches (say, point-of-sale promotion) are more appealing than betting on what may come (mass-market TV spots). In the last recession, online advertising had yet to prove itself as a bona fide option, above or below the line. Now, it's credibly done both.

Second, the brightest aspects of online advertising's appeal are the special strengths of digital as an ad medium. One is accountability. That's what continues to give search advertising its momentum, fueling the growth (albeit slowing) of market leader Google (GOOG). Every marketer can determine what a search-based "click-through" is worth by calculating the impact on sales. It helps, too, that marketers pay only for search ads that result in a click-through. No surprise, search will expand by a healthy 15% in 2009. Another attribute of digital is the compelling user experiences based on rich integrated media formats and built-in interactivity. That's why industry analysts expect spending on online video ads to grow by a robust 45% next year, revised down only slightly from earlier estimates.