The Global Online and Mobile Advertising Industry Outlook

The Global Online and Mobile Advertising Industry Outlook

The online advertising industry outlook

• Business Insights forecasts that the size of the online advertising market will almost double from $42bn in 2007 to $72bn in 2012, growing at a CAGR of 11.4%.
• North America dominated the industry with a 43.6% share in 2009, and is expected to grow at a CAGR of 10% during the period 2007–12. Western Europe took second place with a 28.5% share. However, it will probably lose a marginal amount of its share to the US by 2012.
• As of 2009, more and more users are spending their time either watching TV or using computers. Over time, internet use is expected to overtake that of TV. As a medium, TV continues to be attractive to advertisers in view of its reach and is therefore the largest advertising medium. However, the channel that will register the highest growth rate in market share is online advertising, reinforcing the fact that advertisers follow users.
• Global internet users are expected to increase steadily during the period 2007–12, growing at a CAGR of 13.7% to reach 2,633 million by the end of the forecast period. Mobile broadband users will witness the fastest growth, reaching 963 million by the end of 2012 at a CAGR of 20.9%. However, the global internet penetration rate in 2010 is expected to reach 28.7% in 2010.

The segments of the online advertising industry

• Business Insights forecasts that search advertising will register the highest growth rate among all the segments, growing at a CAGR of 15.6% over 2007–12 to reach $42bn. Display advertising has the second highest share and will also be the second fastest-growing segment, with a CAGR of 9.9%. However, classified is expected to lose share, registering a negative CAGR of 3.4%, to become a mere $5bn business by 2012.
• The drivers of online advertising are e-commerce penetration, online ad spending as a percentage of total expenditure, internet penetration, bandwidth, and costs. Resistors include unregulated content and privacy regulation.
• During 2004–09, as a percentage of online advertising revenues, the performance pricing model steadily increased its share from 42.2% to 58.1%, while cost per mille (CPM) share marginally declined from 41.3% to 38.3%. Hybrid’s share drastically declined from 17.2% to 4.3% over the same period.
• Google dominates the search market space with an overwhelming 67.5% share. Furthermore, it commands a 74.3% market share in global search advertising. However, Microsoft’s Bing could emerge as a threat, resulting in a duopoly, a development that advertisers would welcome as increased competition could lower advertising costs.

The emerging landscape of the online advertising industry

• The $55bn online advertising industry, largely dominated by Google, is poised for a major battle. While Google will continue to monopolize the online ad space for some time, Microsoft could emerge as a strong contender, which may result in a market duopoly in the long run.
• Google’s advertising revenues have steadily increased over the period 2007–09, from $16,413m to $22,889m, reflecting an ever-increasing demand for its services and accounting for 96.8% of its revenues in 2009. Google’s core competency is search advertising, where it is the market leader. The Yahoo/Microsoft and the Microsoft/Facebook partnerships could threaten the company’s long-term profits.
• Yahoo’s ad revenue declined by 10.2% in 2009 to $5,674m from $6,316m in 2008, largely as a result of declining demand for its marketing services and also due to foreign currency rate fluctuations. Yahoo witnessed a steady decline in search market share due to its homepage becoming more focused on editorial content rather than search. Its display ad business is also an area of concern for the company.

• Microsoft's online advertising revenue saw a year-over-year (y-o-y) increase of 5.6% in 2009, reflecting the higher growth rates in its search and display ad business. The search partnership with Yahoo is a clear win-win deal for the company since it provides it the search volume it needs while avoiding the risks associated with a full acquisition. However, Bing is still a marginal player in the search market.
• AOL’s total revenues were $3,257m in 2009, a y-o-y decline of 21.8%, while its ad revenues declined by 16.6% to $1,748m. The firm's main ad-supported content business is running at a substantial loss, reflecting declining demand for its content-driven websites.

Measuring the effectiveness of online advertising

• The web analytics tools provided by search engines serve as a key online marketing tool for advertisers. Analyzing the data revealed by Google Analytics or Yahoo Web Analytics helps website owners to fine-tune their sites more reliably and thereby improve sales.
• Google Analytics supplies key performance indicators, which help to improve websites' performance. Google Analytics is used to track sales and conversions. It helps to measure site engagement goals against the threshold levels that the advertiser defines.
• Yahoo Web Analytics is a website analytics system designed to help website businesses increase sales, reduce marketing costs, and gain insights about online customers, while Bing provides several forms of analysis through its Atlas Advanced Analytics.
• AOL, which markets its offerings to advertisers under the brand “Advertising.com”, offers an optimization technology to evaluate real-time data to maximize performance. It offers both pre-sale and post-sale insights.
• E-commerce sales serve as a useful metric for measuring online advertising in addition to these analytics. E-commerce sales in the US are expected to reach $249bn in 2014, increasing from $155bn in 2009. However, while $155bn worth of consumer goods were bought online in 2009, a larger portion of offline sales were influenced by online research: $917bn retail sales were “web-influenced” sales. The growing volume of online sales clearly demonstrates the importance of online advertising.

The mobile advertising industry outlook

• The $2bn mobile advertising industry (which currently represents just a fraction of online advertising revenues) will witness two dramatic changes: the rise of Apple’s iOS and Google’s Android platforms to a position of dominance, with Android scoring a clear advantage over the former; and the emergence of Asia as the industry’s future growth engine.
• Business Insights forecasts that the global mobile advertising market will grow at a CAGR of 47.75% between 2008-12 to record revenues of $8,100m in 2012. The industry will rebound from 2010 onwards, driven by increased smartphone usage and Android platform penetration.
• The balance of power will shift to the Asia Pacific region, resulting in its share increasing from 28% in 2009 to 39.3% by 2012. The primary reason for this growth will be the high rates of mobile penetration in India and China.
• The search and display segments will improve their shares of total revenues to 36.6% and 31.5%, respectively, by 2012. However, the share of the SMS segment in total revenues will substantially decline, from 57.2% in 2008 to 32% in 2012.
• Apple is building a closed proprietary app ecosystem around its iPhones and iPads and launching its own ad network, iAd, to position itself as a major competitor in the mobile ad space. Google is attempting to transfer its online advertising capabilities to the mobile ad space and aims to position itself as a key player through its in-house operating system, Android. Its core competencies include an open platform and handset vendor versatility.
• Symbian’s OS is a market leader by default since it is carried on Nokia, which is the world’s largest handset seller. However, this position is currently under threat from agile players such as Apple and Google. Research In Motion, meanwhile, is shifting its focus away from enterprise business, foraying into the consumer space to gain traction in the mobile advertising industry.

Emerging models

• Faced with ever-shrinking cost per mille (CPMs) and pressure to generate adequate returns on investment, the industry is searching for alternate models. Business Insights anticipates that in the future four models will reshape the industry. These are: semantic advertising, location-based advertising (LBA), social networking advertising, and video advertising.
• Semantic advertising is largely concerned with identifying the meaning and context of the words on a page in order to deliver the most appropriate advertising. While some companies are working towards building a semantic ad model, the industry is encountering technical challenges in integrating it with existing models.
• In view of the growing popularity of social networking sites, many advertisers consider them to be an effective channel through which to reach the Generation X and Y audience. Social networking ad revenues grew at a CAGR of 42.7% from $500m in 2006 to $3,490m in 2010.
• Online LBA revenues grew at an impressive CAGR of 45.3% during the last five years. Over the next five, however, growth is likely to be sluggish as the category matures. Online LBA revenues will grow at a CAGR of 4.2% to rise from $13bn in 2009 to $16bn in 2014. In the future, LBA is expected to gain the most traction in the mobile space.
• Online video is one of the fastest-growing segments of internet usage in terms of reach and engagement. The online video ad market is forecasted to grow at a CAGR of 32.0% to reach $5,250m in 2014 from $1,100m in 2009. Despite the rapid explosion of online video consumption, online video ads accounted for a mere 2% of online advertising in 2009 (or roughly $1bn). Hulu is the number one website in the US in terms of video ad views. Furthermore, with the advent of smartphones and emerging technologies, mobile video advertising is rapidly gaining traction.