US Internet Advertising Outlook, 2006-2010E

We remain upbeat about the five-year outlook, and project a 20% five-year base-case CAGR for U.S. Internet advertising revenue growth, with above-average growth rates of about 25% for search and rich media. Internet advertising spending per household could move from $177 in 2005E to $362 in 2010E (comparable to 2005E radio advertising spending per household, but still far from $980 for newspapers). Internet’s share of US ad revenue could rise from 7% in 2005E to 13% by 2010E.

Longer term, monetization should grow faster than usage, which should grow faster than users: Recent, very rapid usage growth of online video + voice + usergenerated content (UGC), combined with a high probability of continued innovation, bodes well for continued strong usage growth. Ongoing improvements in monetization are being driven by improved targeting / personalization / usability.

Short-term, possible supply / demand imbalance in display / rich media advertising: Pricing and revenue growth may be pressured in next 12-24 months due to especially rapid inventory growth (related to ramps in attempts to grow ad revenue by the likes of MySpace, Microsoft, YouTube and eBay). We believe the lowerhanging fruit for monetizing Internet video today may be in search and sponsorship formats that we believe may gain noticeable traction in online video as early as CQ1:07.

Key beneficiaries should continue to be Google, which continues to innovate and capture share; Yahoo!, though the next several quarters could present challenges given reliance on branded / display advertising (~35% of CQ2 revenue – see page 9 for details); and eBay, which is beginning to monetize its vast global footprint with search.

Report:
The US Internet Advertising Outlook, 2006-2010(49 Pages)