Online Advertising Spiraling Downward

Abbey Klaassen at AdAge.com published this report last Friday,

“Just three months ago, it seemed as though the internet advertising industry could get through this tough economy relatively unscathed. But in what may be a bad sign for a seemingly recession-resistant sector, several internet companies have reported relatively disappointing earnings.

The giant in the space, Google, didn’t grow as fast as analysts expected, and its shares dropped about 7% on the news. It reported net income of $1.25 billion, or $3.92 per diluted share, up 35% from $925 million, or $2.93 per diluted share, during second-quarter 2007. Of course, Google doesn’t offer financial guidance, so there’s a greater chance investors can be caught off-guard.

The company continued to milk the stronger international economy, which accounted for 52% of total revenue, up from 51%.

Google spreads the blame

Despite the troubles, Google executives didn’t blame the economy or weakness in the online advertising sector, instead attributing the company’s less-stellar-than-hoped-for performance primarily to financial moves and a bit to costs related to its acquisition of advertising service DoubleClick. However, signs from other companies, such as display-ad-heavy ValueClick, indicate the economy is having an effect on the sector.

ValueClick announced it was paring back its second-quarter guidance. The company now estimates growth will be in the low-single digits for 2008, compared with the first quarter’s 17% growth. Display and comparison-shopping business was proving particularly weak.

“Against a deteriorating macro-environment, online display advertising is being materially impacted, much more so than performance-based search advertising,” wrote Citibank analyst Mark Mahaney. “We believe [ValueClick] is seeing display-ad weakness across almost all verticals.” Such news, he added, could have negative implications for a company with a heavy display business, such as Yahoo.”