Log on to the next big thing: internet advertising

published 13 September 2007

Could television advertising become a thing of the past? The 30-second TV advertisement may be on the verge of extinction as online replacements grow in popularity, says Frank Ahrens in the Washington Post. Many of these "produce instant results and valuable consumer data, something that TV advertisements cannot". Internet advertising is already a $25bn-$40bn business, with growth projected at 15%-20% per year in the next five years, according to Seth Gilbert on SeekingAlpha.com.

It's not hard to see why the sector is booming. Traditionally, advertising's effectiveness has been difficult to track. In the 1870s, department store owner John Wanamaker became the "first modern advertiser when he bought space in newspapers to promote his stores", says The Economist. He coined the saying: "Half the money I spend on advertising is wasted the trouble is, I don't know which half." It's easy to spot the problem. An advertisement for nappies broadcast on daytime TV may be appreciated by housewives, but will be completely lost on young students.

But online advertising has changed all this, making it easier to target the right customers and track their responses. A mobile-phone firm could pay to have an advertisement for their brand appear when someone types in certain keywords to a search engine, such as Google. The response to the campaign can then be tracked down to the very last click, which helps the advertiser build up data on their customer base and enables them to gauge how effective the campaign has been, avoiding Wanamaker's concerns about wastage. And because consumers are taking the initiative by searching online, they're a lot more involved than they are with TV. A study by the Online Publishers Association shows that 44% of those watching an online video advertisement follow up either by visiting a website or requesting further information. The customer is always just a few clicks away from an impulse buy.

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And it's not only about pay-per-click. Viral marketing, where a firm places amusing video clips online in the hope that they will be passed around via email, has proved effective in exposing products. Firms are also targeting social networking sites such as Myspace and Facebook. By 2011, global advertising spending on such sites is expected to reach $3.6bn from the $445m spent last year, says researcher eMarketer. Even online games are being invaded, with players hunting one another through cities littered with billboards advertising real firms, or using branded virtual goods.

The big technology firms are certainly excited. In the past two months alone, Microsoft has forked out $6bn in cash for aQuantive, WPP Group has acquired 24/7 Real Media for $649m, Yahoo has put $680m into internet auction exchange Right Media and Google has bought DoubleClick for $3.1bn. These might seem like hefty sums, but the balance of power is fast shifting from old media to new. Last year in the US, network TV advertising revenue rose by 2%, while internet advertising spending rose 35%, says the Interactive Advertising Bureau. In the UK, online advertising overtook newspaper advertising, jumping to more than £2bn. As consumers spend more time online, advertising spending will continue to increase. Below we look at one company that's set to benefit.

With internet retail sales forecast to grow by 40% this year, according to the Interactive Media in Retail Group, internet marketing firms have an eager and ever-expanding audience to pitch advertisements to. Internet Business Group (IBG), through its ownership of AffiliateFuture, acts as a middle man between internet retailers and the owners of other websites. These website owners place retail advertising banners on their own sites and then receive a commission for any customers who make purchases on the original retailers' sites after clicking on the banner. AffiliateFuture also receives a cut of the commission. "IBG has carved a niche in the fast-growing area of affiliate marketing, which is fast becoming the next boom segment of the sector," says Nick Fletcher in The Guardian.

The strength of AffiliateFuture is its network of retailers (more than 750) and affiliates (more than 50,000), says Steve Scott on Motley Fool. It is gaining merchants at a rate of 50% per year and with online retail sales booming there's a lot of commission to be had. It's also a possible takeover target it announced a strategic review in April that's rumoured to have turned into an auction, says Fletcher. Yet the shares trade on a forward p/e of 14.7 for 2008, and with a forecast price to earnings growth ratio of 0.6, earnings growth looks cheap, whether a bid materialises or not.

Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.