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Merrill ups online-ad outlook

By Bambi Francisco, CBS.MarketWatch.com
Last Update: 12:32 PM ET Jan 26, 2005
SAN FRANCISCO (MarketWatch) - Merrill Lynch Wednesday raised its outlook for online ads, predicting that this channel will represent 4.6 percent of U.S. ads this year.

Merrill Internet analyst Lauren Rich Fine projects that marketers will place $12.34 billion in online ads in 2005 out of the $273 billion spent in total U.S. advertising. Fine previously estimated that only 4.2 percent of U.S. ad dollars would go online.

Fine estimates that 3.7 percent of total ad spending went to the Internet last year, or less than $10 billion.

Part of her optimism stems from discussions with major advertisers.

Three large advertisers are now allocating as much as 7 percent of their ad budgets to online marketing, she wrote. These advertisers are in the auto, food and beverage-and-drug businesses.

Indeed, there are a number of fresh signs that support any optimism about overall advertising. EBay (EBAY) said advertising expenses were higher in the fourth quarter and would continue to be so this year. Netflix (NFLX) CEO Reed Hastings said he saw advertising inflation in the fourth quarter and throughout the remainder of this year.

On the flipside, companies that rely on online advertising are showing positive results.

InfoSpace (INSP), which uses online advertising for the bulk of its sales, late Tuesday reported fourth-quarter sales that more than doubled to $79 million. Its online search and directory business saw sales grow 66 percent to $47 million.

Yahoo (YHOO), which reported fourth-quarter results last week said it generated $3 billion for all of 2004 in its marketing services business alone. That was up 150 percent from the previous year. In the fourth quarter, Goldman Sachs estimated that Yahoo's paid-search advertising grew by 74 percent while branded advertising rose 43 percent.

Paid-search growth slowdown

But this year, paid-search advertising may not grow as quickly as it did in the last couple of years. Merrill's Fine estimates that marketers will spend $4.9 billion in paid-search advertising this year, up 44 percent from last year. Paid-search advertising is purchased via keywords and displayed on search-results pages.

Paid-search should remain a big driver of online ad spending this year, but won't be growing as quickly as prior estimates, Merrill's Fine suggested.

Fine now expects paid search, as a percentage of U.S. online spending this year, to drop to 39 percent from a prior estimate of 43 percent.

Other forms of advertising, such as branded advertising, are expected to make up the other portion of online ads, she suggested. Branded advertising is a term used to differentiate ads purchased via CPMs (or cost per 1,000 impressions) versus sponsored links, which includes paid-search advertising and contextual advertising. Unlike branded advertising, contextual advertising is purchased via topics and paid per click. Unlike paid-search, contextual ads are displayed within editorial pages and not search-results pages.

What's the take-away from increasing online ad spending but a slowdown in paid-search? Good news for those positioned to take other forms of online advertising, like Yahoo.

Fine, like many of her Wall Street peers, believes that Yahoo is in a much better position to receive other forms of online advertising, such as branded advertising, over Google.

Fine said that based on traffic data, it appears the biggest beneficiaries of search, Yahoo (YHOO) and Google, (GOOG) are "likely" to see lower share gains because of competition. Data from comScore Networks show that Google's searches are leveling off or slightly decreasing while Yahoo's share is increasing, but at a slower rate than previously forecast, she wrote. She estimates that Yahoo will have 17.9 percent of the paid-search business by 2009, versus her previous estimate of 22 percent, while Google's market share will drop to 15 percent. Google currently has 34.8 percent share of all U.S. searches conducted while Yahoo has 31.8 percent, according to comScore.

To this end, Fine raised her rating on Yahoo (YHOO) to a "buy" while maintaining her "neutral" stance on Google.

Keeping up with video search

Yahoo launched a search service Tuesday that lets users search content on Bloomberg TV, BSkyB and the BBC. Yahoo also unveiled its video-search service on the Web.

On the same day, Google unveiled Google Video, a service that allows users to search for the content of TV programs. Google users will be able to search PBS, the NBA, Fox News and C-Span.

"What Google did for the Web, Google Video aims to do for television," said Larry Page, Google co-founder and president of products. "This preview release demonstrates how searching television can work today."