As the Dow continues to hesitate about how low it wants to drop, and Congress muddles through the scope of the financial bailout program, those anxiously watching and forecasting trends in the online advertising market (and the large measure of the Web supported by it) are starting to sound the alarm bells.

Gawker’s Nick Denton, whose blog empire is wholly supported by ad revenue, has been leading the charge that online advertising faces a severe downturn through the coming year, his case explored in-depth in his doom-mongering blog post. In it, he presents his leading arguments:

• the online advertising market amplifies overall economic trends; it enthralls when the economy is humming along nicely, and bottoms out when the economy stalls. He refers to Mary Meeker’s regression that suggests a 3% drop in ad revenue for every 1% fall in overall economic growth.
• the US economic downturn will be as profound and slow to recover as other prominent national-level downturns like those experienced by Japan in the late 1980s and 1990s, and Indonesia more recently
• online advertising is, despite all claims to the contrary, not mature or measurable enough to avoid a downturn similar to that of Web 1.0

His prescription, in short, is to shuffle content and resources to capture verticals that are safer (technology over politics, for instance), squeeze more out of vendors and content suppliers, and unleash technology and creative resources to innovate.

Lost in this jeremiad is the long tail of publishers, most of which source their traffic through search, and who primarily monetize through contextual advertising and vertically-aligned niche ad networks. Denton, and the WSJ’s Peter Kafka, who posted data supporting the more dire predictions, hail from the world of big media, dominated by brand display advertisers. As I posted before, big (online) media has cause for worry. Publishers that target search traffic and align their advertising towards conversions are likely to continue to do well. After all, search traffic continues to grow, and Microsoft’s Silk Road API announcement only points to growing integration between the search giants and publishers who monetize through their contextual advertising services.

It remains to be seen how display advertising will attempt to forestall the damage inflicted by skittish advertisers, but I believe Denton’s final point about technology and creativity is his strongest argument yet.

Update: TechCrunch’s Erick Schonfeld takes a look at the top 4 online advertisers, sees low-single digit growth in Q3 and projects a flat market for Q4.

This entry was posted on Friday, November 14th, 2008 at 5:46 pm and is filed under Online Advertising. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.