Search Advertising to Lose Importance, Strategic Threat to Google, Says IDC

FRAMINGHAM, Mass., June 14, 2007 � Internet advertising in the United States continues to be both a major business in the Digital Marketplace as well as providing the funding for most of the Internet services consumer use. As U.S. marketers keep moving budgets from the traditional media onto the net, IDC forecasts that Internet advertising will grow about three times as fast as advertising overall during the forecast period. The overall revenue of Internet advertising will grow from $16.9 billion in 2006 to $31.3 billion in 2011 at a compound annual growth rate (CAGR) of 13.5%.

Search advertising will retain its number 1 position as the advertising format garnering the most ad spend. However, even though absolute spending on search advertising will continue to increase, its market share will slowly decline from 40% in 2006 to 32% in 2011 as video advertising grows. This decline poses a strategic challenge to Google, the market leader in search advertising, since more than 99% of its income stems from this type of ad.

As broadband penetration has increased and consumers’ Internet connections allow for the download of data intensive graphics and video, advertisers’ spend on rich media ads (which include broadband video commercials) has been steadily increasing. IDC believes that with the expected breakthrough for video consumption and video ads, this market share will grow fast. The future of Internet advertising and of Google, Yahoo!, and the other players depends on how fast video ads will grow and how well the media companies will be able to capitalize on it.

“Broadband video commercials will experience their breakthrough in the coming years. This will create tremendous opportunities, but also threats, for old and new media companies. At the same time, search advertising will lose market share, which may pose a strategic challenge for Google, the Internet advertising market leader,” said Karsten Weide, program director, Digital Marketplace: New Media and Entertainment at IDC.

IDC’s recently released study, U.S. Internet Advertising 2007 � 2011 Forecast and Analysis: Funding the Consumer Internet (Doc #207106), forecasts expenditures on Internet advertising in the United States for the years 2007�2011. It predicts the overall volume of spending on Internet advertising, provides spending by advertising format, and breaks out mobile Internet advertising. It also offers essential guidance for new and traditional media companies, advertisers and online retailers, and IT vendors.