U.S. online ad market up 35 percent in 2006

Ensuring publisher transparency, increasing advertising quality, and embracing video are key to maintaining a strong U.S. online advertising market, where revenue grew 35 percent in 2006 over 2005, according to an Interactive Advertising Bureau official.

Marketers spent almost $17 billion advertising on U.S. Web sites in 2006, the fourth straight year of expansion for this market, the IAB said in a report issued Wednesday.

“A 35 percent year-on-year growth is fantastic. We’re very pleased,” said Sheryl Draizen, the IAB’s senior vice president and general manager. But to continue the successful run, some things need to be improved, and opportunities must be seized, Draizen said.

For example, too many marketers fail to test their online ads with the same stringency with which they test their ads for other media like television, radio, and print publications.

This is a big mistake because testing online ad campaigns before launching them is critical to ensure they are effective. Marketers often ignore the characteristics of a good online ad, she said.

Publishers also must make marketers increasingly aware that online advertising can help them throughout the entire sales process for their products and services.

The Internet is a tool to build brand awareness and gauge buying intent as well as for actual purchasing and subsequent fostering of customer loyalty, Draizen said.

As such, online advertising deserves a bigger slice of companies’ overall marketing budgets, she said. As things stand now, companies spend less than they should in online advertising, which made up only 6 percent of the total ad revenue in 2006.

“This is disproportionately low if you look at the total Internet audience and the amount of time people spend online,” Draizen said. By comparison, marketers spent almost $58 billion in direct mail advertising and about $51.2 billion in newspaper ads in 2006.

Ultimately, marketers tend to stick to strategies that have worked for them, and they consider shifting ad dollars to the online medium as a risk mostly because it represents a change in tactics, she said. However, with each passing year, online advertising is perceived as less and less of a gamble, she said.

It’s also critical for publishers to deliver “the highest level of transparency and accountability” so that advertisers’ confidence will continue to grow, she said. On this topic, click fraud incidence is currently very low and isn’t having an adverse effect in online ad spending, Draizen said. Other industry observers, however, say click-fraud incidence is significantly high and seriously hurts the effectiveness of search advertising.

Click fraud occurs when someone clicks on a pay-per-click ad without any intent to do business with the advertiser. Reasons for engaging in click fraud include the desire of a site publisher to increase commission revenue or the attempt by an advertiser’s competitor to drive up its ad spending.

One of the biggest growth opportunities in online advertising this year and next year will be video ads, which offer marketers an ad format that packs the appeal of TV ads and the targeting precision of Internet ads, Draizen said.

Some highlights of the study include:

* Search engine advertising made up 40 percent of online ad revenue in 2006, ranking as the biggest segment of the market.

* Display advertising, which includes both banner and rich-media ads, generated 32 percent of the total revenue.

* The 10 largest ad-selling companies grabbed 69 percent of total revenue, and the top 50 companies nabbed 93 percent.

* Ads billed per impression generated 48 percent of revenue, while those billed per a specific action, like a click, made up 47 percent.