With the traditional advertising industry standing on the edge of a precipice, the continued growth of online advertising is seen as key to the long-term health of the industry as a whole. While online adspend was buoyant during most of 2008, the coming year will test the durability of online as a marketing medium.
Early indications suggest that online has avoided the draconian cuts that have afflicted television and print advertising. However, internet advertising now faces the biggest challenge in its decade-long history as a surplus of inventory - places to advertise - drives ad rates down.
Research conducted exclusively for Marketing by Nielsen shows that some of the UK's top telecoms, technology and gambling brands increased their investment in online advertising in 2008. However, finance brands, which previously dominated the medium, severely curtailed their budgets in response to the global financial crisis.
The top 100 online advertisers survey shows that the top spenders last year were over-whelmingly media and telecoms brands. They used internet display ads to boost direct response and sign up customers for services such as 'four-play' - mobile and home telephony, TV and broadband - contracts. The government's COI was the third-biggest spender in the sector, with a budget of just over £7m. Microsoft and Dell make the top 10, having exploited the obvious fit between their target audiences and the medium. Online gaming brands also continued to invest heavily in online advertising.
Mobile network O2 dominates the 2008 spending league table with a budget of £12.3m, a slight reduction on 2007's level. Its online spend accounted for nearly a quarter of O2's entire ad budget, and far outstripped the spend of its nearest top 100 rival, BT, which boosted its budget by a third to £8.7m.
O2's head of online consumer sales, Achilleas Kanaris, believes that his company could benefit from the deflation in online advertising rates. 'We will maintain at least the same level of activity,' he says. 'Depending on our approach and selection of media, we may achieve a reduction in rates. We certainly aspire to do this. There is opportunity in this space.'
Mobile operator T-Mobile also pumped up its budget, to back its growing focus on digital and viral marketing, while BT significantly increased its online spend as the battle to sign up broadband customers intensified.
Despite these trends, the events of recent months have overturned a long-held belief that online advertising would somehow escape the economic downturn. Some observers believed brands would invest more heavily in the medium during the recession because of the web's inherent measurability and transparency.
Yet, as Robert Horler, founder of digital agency Diffiniti, says: 'The unfettered growth of online in all areas has slowed dramatically. In display advertising, the market will probably be flat this year or grow by, at most, 3%.'
Overall, he notes that 2008 was reasonably healthy for online ad revenues, although the situation changed quickly with the onset of the global banking crisis last autumn. This devastated Q4 revenues and set the scene for the year ahead. 'In Q3, we were predicting the market in 2009 would be up 15%; now we are saying it will increase by between 0%-3%,' says Horler.
However, as relatively cheap as online advertising may become, it is important for brands to do more than find the lowest-cost deal. Horler warns that brand owners need to learn to extract maximum value through clever optimisation and the best use of formats such as online video and other types of rich media. Â
Microsoft's central marketing group director Alison Masters says video and rich media are particularly important for online brand-building. The company's 'I'm a PC' campaign used an integrated approach through a tie-up with commercial radio company GCap Media, now Global Radio. Other areas of spend target technical users.
'We continue to use online display advertising because it is much more targeted towards our audiences,' she says. 'A lot of those we focus on are in the technical and developer space, so online is really relevant.'
The biggest riser in the Top 100 was PC World. The DSGi-owned retailer ramped up its spend by more than 1000% to just under £3m. Online gaming company Gamesys delivered a 300% increase in spend, while William Hill upped its investment by nearly 30% to £4.7m.
According to Lester Fernandes, head of product marketing for William Hill Online, the company will boost its budget again this year after seeing the positive effects of the online campaigns it launched in 2008 to promote its online bingo and casino lines, as well as its core sports product.
Crucially, William Hill has been able to strike beneficial deals with online media owners. 'We are finding that media owners are more keen to do long-term deals based on non-standard pricing models, and move away from the rate card to sharing some of the risk,' says Fernandes.
Advertising networks, which buy up and sell swathes of online inventory, often by target audience, have had a significant effect on the market. Some say they are bringing costs down for advertisers, although others argue that using the networks can lead to scattergun advertising on sites unknown to the brand owner.
Thomson, last year's biggest-spending holiday brand, made extensive use of advertising networks. Nathan Timmins, head of online marketing at parent company TUI, says that display is a small, although important, part of the brand's online marketing, which includes affiliates and search marketing.
'A strong online presence is essential to support our overall distribution mix,' he adds. 'For 2008, much of our spend was on direct acquisition activity through some of the larger networks, such as Blue Lithium, Ad.com, our partnership with AOL and CPM activity across TripAdvisor.'
For some, online display has staged a comeback against its internet rival search marketing, which has soaked up an increasing share of digital marketing budgets over the past five years. 'Display has stopped taking such a beating from search when it comes to budget allocation,' says Matt O'Brien, managing director of digital agency Cheeze.
While advertising on major portals such as MSN comes at a premium and is useful for brand-building, much online display advertising is directed toward direct response. Smart use of technology can boost the effectiveness of this, argues O'Brien, who says his agency has done well for clients, particularly in the travel industry, through the technique of 're-targeting' - when a consumer visits a travel site but quits before making a purchase, they can be targeted again when they return to the site.
'Brand-building will always remain through premium sites, but the acquisition side is allowing more people to monetise inventory,' adds O'Brien.
The online advertising industry faces a great challenge in the coming months. Whether it attracts a greater share of ad budgets will be the big question for 2009.
The sectors that invest most in online advertising
Entertainment and media brands dominated online advertising in 2008, spending nearly £80m and outstripping the finance sector, which previously overshadowed all other categories.
Finance and auto brands have axed tens of millions of pounds' worth of online campaigns as they reel from the effects of the credit crisis. The decline of such prolific internet advertisers is resulting in lower rates for everybody.
'At the end of 2008, ad budgets were cut, and these two big sectors - finance and auto - were hit heavily because they didn't have the products such as mortgages or new models to advertise,' says Alex Burmaster, communications director at Nielsen. 'The result is there is more inventory available.'
Nielsen identified Personal Loan Express as the nation's number-one online display advertiser in 2007, when it spent £28.5m. However, the company collapsed into administration last year taking its ad spend with it. Other major financial advertisers in 2007, such
as Capital One, Virgin Money and Eloanshop, also dramatically cut spending; however, others, including Halifax, ING and American Express, went against this trend by boosting their investment.
High-spending categories in 2008 included telecoms, travel and transport, business, computers and online retail. While they may be curtailing spend for the time being, these sectors could boost their budgets during the coming decade. Whether they will ever replace the frenetic financial activity of 2007 remains to be seen.
One problem facing online display is the growth in the amount of time consumers spend on relatively 'unmonetised' sites such as Facebook. Burmaster estimates that a fifth of online time is spent on consumer-generated media. This is forcing brands to re-evaluate online display advertising.
Historically, it has been considered less effective than TV advertising, since skyscrapers and banner ads offer limited opportunities to tell a story about a brand. However, the situation gets even worse if consumers are spending so much time on no-ad social sites that brands may consider shifting spend from online back into above-the-line media, with its record low rates. Then again, the growth of rich media and online video, with a strong element of interactivity, should ultimately provide online with greater possibilities for storytelling and engagement than TV.
A notable laggard in online display advertising is the FMCG sector. Food, cosmetics and toiletries and drink brands barely mustered £15m of spend between them last year.
In terms of online display spending as a proportion of overall ad budgets, telecoms has the highest percentage of the big-spending categories, spending £62.5m out of a total £531.5m. Online retail is also a high-percentage spender, with nearly one-third of total adspend for the category going to online display.
As the push for ultra-high-speed broadband takes off and online retailing comes into its own, these categories may drive online spending. There are hopes that internet display advertising will quickly slough off the downturn and return to its booming best.