Some interesting commentary around latest results from Google, Yahoo, Facebook and other text based advertising channels

http://www.marketwatch.com/story/online-ad-business-has-reached-maturity-2012-10-19

Online ad business has reached maturity

Commentary: Google’s latest results should challenge growth views

By John Shinal

SAN FRANCISCO (MarketWatch) — Long-term business trends are like large ships sailing the ocean: they take a long time to change direction. Once they do start to turn, a sudden reversal back to their original course is highly unlikely.

Reuters

Google Chairman Eric Schmidt shows off a new Motorola phone at an event last month. The Internet titan is pushing hard to grow its mobile search ad business.

So it is with the current course of Internet advertising, a market roughly 15 years old whose growth rate has slowed significantly during the past five years.
Now that Google (NASDAQ:GOOG) — the largest seller of Internet advertising by far — has reported a 15 percent year-over-year drop in the price of search ads, the turn is clearly well under way, and perhaps accelerating.
The online ad business isn’t just maturing, though. It’s also undergoing a massive shift toward video and mobile spots and away from text-based or static [non-video] display ads. That means tech investors who own shares of companies that depend on the older model would do well to take a skeptical look at their long-term revenue growth assumptions.
If Google is feeling the pinch, you can bet that so are Facebook (NASDAQ:FB) and Yahoo (NASDAQ:YHOO) , which is why their shares fell Thursday when Google’s third-quarter results snuck out early.

And, in a tougher online environment in which the price of ads is falling, the growth prospects for young public companies such as Yelp (NYSE:YELP) or Angie’s List (NASDAQ:ANGI) will also need to be trimmed.

The latest numbers from the Interactive Advertising Bureau, released last week, support this view. They also show that online ad growth has never recovered from the deep U.S. recession that began in 2008.
Total online ad spending rose 14 percent in the second quarter of this year, to $8.7 billion from $7.7 billion a year earlier. For the first half of 2012, spending also rose 14 percent year-over-year. That’s a significant slowdown from the first half of 2011, when the growth rate was 23 percent.
In the four years prior to the recession, first-half growth rates ranged between 25 percent and 40 percent. Since the economic meltdown, however, the average growth rate has been less than 20 percent.
At the same time, mobile ad spending nearly doubled in the first half to $1.2 billion. Although it’s coming off a much-smaller base, mobile is clearly the biggest growth driver in the industry.
And while display advertising in the first half of the year rose just 4 percent, its video component rose 18 percent from a year earlier.

Visible on the horizon

The shift in online advertising has been visible for some time. The quarter ended in September is the third consecutive reporting period in which Google’s cost-per-click number suffered a double-digit percentage drop compared to the year-earlier periods.
And since July, Facebook shares have been hammered by concerns about whether the social network can negotiate the shift of their users to mobile devices and away from desktop PCs. Read about challenges faced by Google and Facebook in a previous column here:

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Why Google missed targets

Google prematurely released its quarterly earnings midday Thursday, reporting that profit declined 20%. S&P Capital IQ Internet Analyst Scott Kessler on The News Hub discusses the big earnings miss and how the numbers slipped out hours earlier than planned.

When markets begin to slow and shift, the top one or two players in a business tend to weather the tough times better than their smaller rivals. This is precisely what happened in the networking-equipment industry at the beginning of last decade, when corporate customers dramatically slowed their purchases of Internet gear.
Once large businesses had wired themselves for the Internet age, they didn’t need to do it all over again. While the shift hurt networking king Cisco Systems (NASDAQ:CSCO) — and punished its shareholders — it managed to survive and even consolidate its position in many market niches.
All of Cisco’s longstanding rivals, meanwhile, such as 3Com, Lucent Technologies and Nortel Networks, didn’t survive as stand-alone companies. All were acquired for market caps far below their respective peak values. Today, Cisco’s only competitor of note to investors is Juniper Networks (NYSE:JNPR) .
There’s no reason to doubt that smaller Internet companies are going to suffer the most in an online ad spending environment marked by slower growth and shifting spending patterns.
These aren’t trends that are going to suddenly reverse course, because they’re based on a broad shift in how consumers access the Web. Online users once read the Internet like a newspaper. More and more, they’re watching it like a television.
If Web companies don’t have a strategy for capturing the rise in mobile and video ad spending, they are operating in a market that’s slowed significantly and will continue to.
Tech investors who own their shares may want to get out of the way of that large ship steaming straight toward them.