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Advertising Goes Off the Radio

Ad dollars are deserting radio airwaves for the Internet even faster than expected, studies show

by Catherine Holahan,

The radio industry won't want to hear this. Advertising dollars are shifting online faster than analysts anticipated. In fact, advertisers will soon spend as much money on the Internet as they do on the airwaves, according to a newly released eMarketer study. On Dec. 6, the New York research firm increased its estimate for 2006 online advertising spending by $500 million, to $16.4 billion.

The new estimate means online advertising will pull in about 5.8% of the more than $281 billion advertisers are expected to spend this year. That's less than radio's 6.9%, according to Universal McCann (IPG), which tracks the radio industry. However, radio's share is declining while online share is growing, says David Hallerman, a senior analyst at eMarketer.

By 2007, online advertising will bring in 6.8% of the total and, by 2008, it will bring in 8.1%—putting it well over radio. By some estimates, online ad spending will overtake radio even sooner. Forrester Research (FORR) anticipates online advertising will bring in $17.4 billion this year—that's a billion more than eMarketer's estimate and would be roughly 6.2% of the total, putting online advertising much closer to overtaking radio.

Hallerman says the firm initially expected that the recent difficulties of Yahoo! (YHOO) in attracting ad revenue—caused in part by a slowdown in automotive advertising—would translate into slower growth for the industry as a whole (see, 9/21/06, "Yahoo's Ad Slump"). However, other sites made up for Yahoo's shortfall. In fact, some of Yahoo's troubles may have been partly because of competition from other sites such as Google (GOOG), Time Warner's newly ad-supported AOL (TWX), News Corp's MySpace (NWS), and newspaper sites.

Print Losing Out

The radio industry isn't the only one getting some unwelcome news. Though some of the increase in online ad spending reflects a shift from radio, much of it is coming from print newspapers, which have lost ad dollars as the readership for this medium has declined. In 2006, only 38% of people reported reading the print edition of the newspaper the day prior to the survey, according to a July report by the Pew Research Center. That's down from 50% of people who regularly read print newspapers a decade ago.

Radio audiences are shrinking also, though possibly not as swiftly. "Radio is not losing audience in the same way newspapers are losing print readers," says Hallerman. "That's why it hasn't been as hard-hit in terms of dollar loss."

And a bigger hit may be coming. Hallerman notes that radio share losses may accelerate as online advertising becomes more diverse and easier to develop. Now, for example, smaller firms not well represented on the Web may refrain from advertising online because they do not have a site that Web surfers can visit. As making Web sites becomes easier, cheaper, and more common, smaller businesses and others may shift more of their ad budgets online. Click-to-call advertising, offered by eBay (EBAY) and others, also has the potential to bring more local advertising dollars online, away from the local radio station.

TV, Too?

In the short term, however, newspapers will feel the most pain from Internet advertising gains. To some extent, they are prepared.

Newspapers have been pushing more of their efforts into online editions in recent years. On Jan. 2, The Wall Street Journal plans to unveil a smaller print edition and put many of its breaking news stories online (see, 12/06/06, "The Small Street Journal").

However, gains in online readership have yet to compensate for losses in print audience, according to the Pew study. Adding the number of Web newspaper readers, the percentage of readers jumps only to 43%, from 38%—leaving a seven percentage-point gap from the level of readers who regularly turned to print newspapers a decade ago. (Declines have not been the same for magazines, Hallerman notes. He attributed this to magazines having a more targeted audience and, in some cases, better brand recognition.)

Television also has to look out. As online video increases, more advertising dollars will shift away from broadcast networks, says Hallerman. "In about two years or so, there will be enough professional created video content online and there will be more sites for video advertising," says Hallerman. "At that point online advertising will take a bit from TV's share."

America Is Online

The reason for the shift is clear when looking at how Americans spend their time. In the first quarter of 2006, people reported spending more than an hour on the Internet per day and only 23 minutes reading books and magazines, according to a September, 2006 report by eMarketer's James Belcher. Meanwhile, advertisers spent 38.2% of their advertising budgets on magazines and newspapers combined in the first half of 2006. They spent only 6.4% on the Internet during that same period, according to a September TNS Media Intelligence report.

More shift is expected. Advertisers see large sales returns on their online investments, and their concerns are abating that money may be wasted due to click fraud or the artificial inflation of ad traffic, says Hallerman. Forrester estimates that by 2010 U.S. online ad spending will reach $26 billion. By then, online advertising will have surpassed radio. Next milestone: newspapers.