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77% of Advertising on the Web Is Bought by 'Dot-Com' Firms

Study: As stronger Net firms rely on ads for revenue, analysts worry that an avalanche of Web failures may cause ripple effect.

September 06, 2000|JOSEPH MENN | TIMES STAFF WRITER

A surprising three-fourths of advertising purchased on the World Wide Web comes from other Internet companies, according to a study released Monday by a unit of Media Metrix.

The study of the biggest 200 advertisers on the Web found that the proportion of ads purchased by "dot-com" firms climbed to 77% in July, up from 64% a year earlier.

The survey's results surprised analysts who are concerned that an avalanche of dot-com failures could have a profound effect on healthier Internet companies, such as CNet, Excite@Home, AltaVista, Yahoo and others, that depend on dot-coms for advertising.

Only last week, shares in top Web portal Yahoo fell more than 15% after Lehman Bros. analyst Holly Becker noted that more than 60% of Yahoo's ads are placed by dot-coms and that in July the total number of ads viewed on Yahoo dropped by 20%.

"As Internet companies' cash reserves dwindle and prospects for profitability aren't near-term, many of these companies are cutting back on spending," said analyst Derek Brown of WR Hambrecht & Co. in San Francisco. "That could have a ripple effect."

Analysts agree that the worst dot-com fallout is still to come in financial results from the second half of this year. Becker said the real "belt-tightening" on the part of Internet advertisers began in June.

Until recently, Brown and others had thought that Fortune 500 companies were spending more advertising money on the Web because they are being aggressively courted by Internet publishers.

Yet the new study shows the continued reliance on dot-com advertisers. "I would have expected their numbers to decline" relative to bricks-and-mortar firms, Brown said.

That has been the conventional wisdom of Internet analysts, as scores of bankruptcies, mergers and layoffs sweep through such firms as Living.com, Value America and Toysmart.com.

Typical was a research note last month by Merrill Lynch analyst Henry Blodget: "Fortune 500 spending continues to move online at a healthy and encouraging rate, but this growth of dollars is being offset by the loss of dollars from the dot-com community."

Becker was more skeptical. "We continue to look for signs that traditional advertisers are embracing online advertising. But we are receiving little comfort," she said. "We think it is highly unlikely that traditional players will pick up the slack."

The 200 companies tracked in the new AdRelevance study together account for about three-fourths of the ads on the Internet, said Charlie Buchwalter, the firm's vice president. AdRelevance is part of online ratings company Media Metrix.

The firm said the overall number of online ad impressions is now about the same as it was this spring, when the stocks of many dot-coms began to slide.

The report draws no conclusions about a domino effect on ad revenues. But its figures contrast with other rosy reports and projections for online ad spending.

For example, the Internet Advertising Bureau said a month ago that online ads brought in $2 billion during the first three months of this year, up 10% from the last quarter of 1999.

Even after the dot-com slide gathered momentum, Jupiter Communications said corporations will boost their online ad spending to $16.5 billion in 2005.

Wall Street analysts, however, have been raising warning flags in the past few weeks that have sent some shares in Net stalwarts reeling.

Yahoo declined to confirm the percentage of revenue it gets from its Internet brethren.

"We are not immune to the changes in the dot-com world generally," the company said in a statement. "We are working a little harder in this quarter than in the past, given the tightness in dot-com advertising budgets."

Yahoo shares rebounded slightly Tuesday, gaining $3.19 to $117.13.

AltaVista Vice President Ken Neibaur said he didn't know the percentage of Net companies buying ads at his portal, but said, "There hasn't been a decline in their spending."

And he said Wall Street's reaction to recent reports may have been overblown. "It's kind of jumpy right now," he said.

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