Display Still Surging, But Some Key Players Appear To Soften

There’s no question that display advertising continues to be one of the fastest growing parts of online advertising, but some of the largest bellwethers in the space appeared to stumble in Q1. Both AOL and Yahoo experienced slight declines in display, and even Facebook had to admit just prior to issuing its troubled IPO a few weeks ago that its revenue picture was not as bright as previously thought (an admission that led to the immediate wilting of its stock offering).

Part of the stumbles those companies experienced surely have much to do with their internal sales issues. But as the latest economic figures come in this week – the economy grew less than two percent in May as job creation slowed even further, stocks had their worst month since September – that is likely to have an impact on advertisers’ budgets. In terms of what it means for display, the space is no doubt strong. It just may not be as strong as previously thought.

"I would not underestimate the growth of programmatic buying and commoditization of display advertising" on diminishing the value of banner ads, still the largest portion of display with a 21 percent share of that spending, said eMarketer senior analyst David Hallerman. "Without larger growth in video, which attracts relative higher prices than standard banner ads, the display market could stagnate over the next few years."

Hallerman also pointed to Facebook as a cause and beneficiary of the practically infinite expansion of display inventory.  And while video remains an increasingly attractive proposition for brand ad dollars thanks to its resemblance to TV advertising, a tremendous gap persists between online video and TV prices.  "There’s an active interest in video by large advertisers, but it still represents a small share of display advertising because even the brand marketers attach ads to content that they know and love. That may shift as more professional content comes online. But for expensive ad campaigns, TV is still first and foremost in marketers' minds."

Expectations of “strength” are obviously a matter of perspective. Taking a wider look, it could very well be that Q1’s apparent softness was due to higher expenditures in Q4, when the economy was looking more propulsive. As the Interactive Advertising Bureau noted in April, total display dollars in 2011 rose 15 percent to $11.1 billion and gained 10 percent in Q4. (Putting those numbers in further context, search in 2011 jumped 29 percent for the full year and gained 27 percent in Q4.)

Increasingly, when we talk about the health of the display market, we’re speaking about how well Google and Facebook are doing. Combined, Google and Facebook's display ad revenues will account for 33.3 percent of total display ad spending in 2012, eMarketer predicts, adding that the dual force of the search giant and the social network will command 38.8 percent of display spending by 2014.

In between that time, the two will battle it out for first place. Facebook passed Yahoo last year to become the leader in display ad sales in the U.S. But Facebook’s dominance may be short-lived. Google's display business is growing faster than anticipated -- and is set to surpass Facebook's next year, eMarketer says.

Facebook's share of overall U.S. display ad market revenues grew to 14 percent in 2011, up from 11.5 percent in 2010. This year, even with downwardly revised numbers, Facebook's share of display is expected to grow to an impressive 16.8 percent. By comparison, Google's share of U.S. display ad revenues is expected to reach 16.5 percent in 2012, up from 13.8 percent in 2011 and 12.1 percent in 2010.

The shifting shares of the display pie are affecting spending on AOL and Yahoo. The two portals may not have a shot at first or second place in display, but they still command a sizable amount of the market, especially as they continue to ramp up their respective video offerings. Again, neither has a chance of displacing Google’s YouTube, but it’s not clear that YouTube’s attempts to showcase itself as a portal for premium video content – and the brand ad dollars that are intended to support those efforts – will be a major success either. Facebook not only needs to improve its mobile offerings – another segment of online that is swiftly rising – it needs to develop a video monetization strategy, something that is hardly clear.

In terms of Facebook’s outlook after a weak Q1, eMarketer's Hallerman told AdExchanger, “Q2 doesn’t look any better. Wall Street analysts now say Facebook stands to earn roughly $4.8 billion this year -- well short of market expectations from February, when eMarketer predicted Facebook would earn $6.1 billion in 2012.”

Turning to AOL, the company had been growing double-digits for the past year, but stalled in Q1 with a mere 1 percent gain in total and a 1 percent decline in the U.S. International display is where things seemed to be surging, as revenues jumped 34 percent, though it remains a small part of the overall business at this point.

Advertising.com is still the key driver of AOL's display business.  Third party network revenue increased $20.8 million, reflecting 14 percent growth in Ad.com and $2.4 million related to one month of additional video dollars coming from goviral, which was acquired in January  2011. Advertising.com growth reflects an increase in advertisers and publishers on the network and increased sales of premium packages and products, the company said. The performance of the third party network is what led, in part, to AOL’s latest executive shuffle last month, which had Chief Revenue Officer Ned Brody relinquishing that broader post to become CEO of the Ad.com Group.

As Ad.com seems solid, AOL has to improve its owned & operated sales. The domestic display advertising revenue declines were pinned on falling reserved impressions sold, though AOL said it was offset by some gains in reserved inventory pricing and advertising from AOL's local news network, Patch. The company does not specify revenue figures for that property, but claimed it grew traffic and advertisers over 40 percent year-over-year and revenue over 100 percent year-over-year. But without identifying numbers, it’s safe to surmise that it remains small.

Yahoo, which has been through even bigger changes at the top as CEO Scott Thompson and replaced on an interim basis by Ross Levinsohn, posted a display decline of 2 percent. That was the second straight quarter of dropping display revenues. One of the knocks against Thompson and his predecessor Carol Bartz was that they lacked media and sales experience. While it’s not clear that Levinsohn, a widely respected digital sales hand, will be permanently installed as the Yahoo’s leader, his appointment suggests that Yahoo’s board recognizes that at least someone with that experience is key to any turnaround. Apart from that, the company also needs to decide how its Right Media ad exchange fits – or doesn’t fit – into its rebuilding of its display strategy.

What about the use of more interactive, more creative homepage ads such as AOL's Project Devil spots? Macquarie Capital analyst Ben Schachter recently found some improvement in AOL's and Yahoo's sales of these "premium" placements, though YouTube remains the leader. Again, Hallerman sees these ads as better than nothing, but doesn't expect their use to make a substantive difference in these companies' respective bottom lines.

"There’s not enough of that kind of inventory to make a difference and attract enough money to move the needle," Hallerman said. "Yes, it’s a good thing to have larger, higher CPM-worthy placements on the homepage relative to not having it. But the best way to regard these ads is that they're like a strong spice in a dish -- it’s not the whole meal."

Lastly, ValueClick tends to embody the mixed picture of display’s wider opportunities and challenges. The ad network has positioned itself well with last August’s $295 million purchase of retargeter Dotomi and the $70 million April 2011 acquisition of mobile ad network Greystripe. The two additions helped round out ValueClick’s focus on affiliate marketing, in the case of the former, and the growing importance of mobile in the display space.

The company’s Q1 revenues were positive, rising 31 percent, but nevertheless missed Wall St.’s expectations. In his post-mortem of the company’s position, Mark Mahaney, Citi Group analyst, ValueClick has to contend with “moderate softness” in the technology ad spending, as the segment is slated to only grow 7 percent over last year. In addition, its owned & operated sites are plagued by continued weakness in the face of competition from Google and Facebook.

By David Kaplan

 

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