Online ad spend has burst through the £2bn barrier in the UK and is now bigger than national newspapers, radio or outdoor - and almost half the size of the TV ad market.
But the detail of a report released last week by the Internet Advertising Bureau (IAB) in partnership with PricewaterhouseCoopers, shows that 58% of revenue still comes from paid search, which not everyone regards as advertising (Feature, page 24).
However, clients did spend hundreds of millions of pounds on display and classified advertising online. IAB chief executive Guy Phillipson notes that online propped up the UK advertising sector in 2006 - traditional media fell 2.9% year on year, but online spend meant the overall market rose 1.1%.
"From a creative point of view, online forces agencies to create entertaining, engaging material," he says, highlighting campaigns such as last year's ad for Volkswagen Golf from Crispin Porter Bogusky, which had its genesis online, but was adapted for other media.
In the UK, growth in online ads is still largely driven by increased budgets from the main sectors of recruitment, finance and technology. But Phillipson says online display has been rejuvenated by new rich media formats, such as video, and the rise of online shopping.
E-commerce is also growing at about 40% a year in the UK and the IAB boss says this has fuelled the growth in tenancies - where advertisers take a concession on the main page of a site, such as L'Oreal on Hearst Digital's Handbag.com women's portal. Tenancies are worth about £70m a year, compared with conventional sponsorships at £20m.
Blake Chandlee, Yahoo!'s commercial director, says new technology has boosted online display. "What's really driving it is being able to use targeting demographically, geographically and behaviourally," he explains. "There are also new interactive ad formats, from third parties such as Eyeblaster."
The IAB says consumer goods advertising, including fast moving consumer goods, food and drink, and health and beauty, represents 4.4% of total ad spend online. Brands in this category tend to use the internet for brand building via display, rather than direct response via search or classified.
Online spending to promote consumer goods rose in 2006, but, the huge growth in other categories means advertising share in this category actually declined, from 4.9% a year ago.
The UK, which has one of the world's highest rates of broadband penetration, also leads the world for share of advertising spend online, at 12.4% in 2006, compared with the global average of 5.8%.
The biggest growth is still coming from paid search, where advertisers bid on keywords to appear in the sponsored links section of a search results page.
Andy Mitchell, managing director of online sales house AdLink, says search is enjoying massive growth because of the low barrier to entry for new advertisers wanting to test the medium.
Search is also bigger in the UK than elsewhere. In the US, it only accounts for 40% of online advertising revenue, compared with 57.8% here. Arjo Ghosh, chief executive of specialist search agency Spannerworks, says that the US advertising market is much more regional than the UK, so the advent of local search will make it more compelling.
The big success story of 2006 was social media, including blogging and social networking sites such as MySpace and Bebo. This boosted search revenues, since contextual text ads - ads on the side of a page with relevant content - are powered by search engines and counted in the search totals.
Stephanie Carr, deputy managing director of specialist agency The Search Works, says contextual ads function differently and have lower conversion rates than pure paid search. They make up an estimated 10% of the ads she books through Google, but other networks such as Yahoo! and Miva don't allow advertisers to choose.
So online growth is coming from all quarters, including FMCG advertisers and the growth of rich media such as video, social networking and e-commerce. But this growth is still dwarfed by the effect of the growth in search on the overall figures.
ONLINE AD GROWTH 2006
- Annual revenue of £2bn in the UK: more than half the £3.9bn spent on TV advertising and surpassing the £1.9bn spent on national newspapers
- Online advertising has a market share of 10.9% for the full year, while accelerated growth in the second half of 2006 gave it a market share of 12.4%
- The year-on-year growth rate for 2006 was 41.2%, slowing from 65.6% in 2005
- Online fuelled the 1.1% growth in the entire advertising market; traditional media combined fell by 2.9%, or £466.1m
- Online display advertising (including banners, skyscrapers, online sponsorships and rich media such as video) rose 35% year on year to £453.7m
- Paid search (including contextual text ads on social media) grew 52%, to £1.2bn
- Online classified advertising was up 45%, to £379m
- The dominant categories were recruitment, finance, technology, automotive, entertainment and media, property and retail
- The drivers were the growth of broadband, the increasing use of video advertising and the explosion of user-generated content and social networking
Source: IAB/PwC Online Adspend Report.
This article was first published on Media Week