Will the internet survive the economic meltdown?

Sly Bailey says the internet boom is about to go bust. But is the Mirror chief right? Ian Reeves investigates

I wouldn’t mind waking up to find myself back in 1999. I’d have more hair, for a start. I’d have The Matrix to look forward to. I could “surf the net”, because that’s what we called it, while guiltily sharing music files free on Napster.

But Sly Bailey has a more sinister view of the year. “Remember 1999?,” she rather gloomily asked last week’s Association of Online Publishers’ conference. “Well 2009 will be like Groundhog Day. For the lucky we should expect consolidation – and for the less fortunate, failure.” The Trinity Mirror boss said she was “firmly of the belief that there will be casualties in the coming months”.

She’s not the only senior media figure predicting blood on the digital publishing carpet. Maurice Levy, the chairman and chief executive of Publicis, warned of a second bust as long ago as last November. “Far too many people are building plans based on advertising and they may well be disappointed because there is not enough money for everyone,” he said. “It’s exactly the same situation as we saw at the end of the 1990s, when everyone thought that because he had a website he’d get the valuation. Now everyone building a Web 2.0 operation believes he will receive the advertising.”

If I was to quibble with Bailey on the timeline, I’d reckon she’s a few months out – March 2000 is widely recognised as being the peak of that first bubble – but nonetheless, with the credit crunch kicking in, it stands to reason that online publishing is in for a torrid time. Doesn’t it? Some of the signs, admittedly, aren’t great. Yahoo shares are at their lowest value since 2003. Even the mighty Google’s grip on growth is loosening, and its net revenue was actually down in the second quarter of 2008 compared to the previous period .

Meanwhile, research published last week by media analyst group Enders suggested that growth for UK online media advertising would be considerably lower than the 28 per cent that had been expected for 2008 – its revised estimate is a more modest 18.5 per cent. Financial, recruitment and property advertisers are all cutting their spending plans, the report suggests.

Similarly, venture capital groups are becoming worried about their investment exits. There has been virtually no company flotations this year – a common method for a venture capitalist investor to recoup money on a digital publishing investment. The result is that one source of investment capital is drying up.

But before we get carried away on this wave of despair, there are some more healthy predictions out there. On Wednesday, the Internet Advertising Bureau will unveil its own research for the first half of the year. Its chief executive, Guy Phillipson, will tell a Westminster eForum seminar on online advertising that the internet advertising spend has been above expectations for the six months to June, despite the downturn. “We’re seeing serious consumer demand, and an increasing realisation that online is the most efficient way of satisfying that need,” he says.

“Since 1999, online has grown from nothing to a £3bn industry in this country. It’s simply the best direct response medium ever invented.”

Emma Jenkins, head of interactive marketing at Procter & Gamble, backs up his optimism: “It’s important to remember that the digital industry remains buoyant, at least for now,” she says. “I think you’ll see some people moving their money away from marketing streams that are less accountable, and moving into digital areas – search is a great example of that… in terms of capping the dollars you spend but making sure that every dollar is absolutely accountable.”

Similarly, Alison Fennah, executive director of the European Interactive Advertising Association, believes it would be “wrong and inappropriate” to compare now with the time leading up to the first dotcom bust.

She quotes figures from EIAA’s recent Internet Ad Barometer report, showing that 81 per cent of advertisers claim that their allocated online ad spend has grown in 2008 and predict that it will continue to do so over the next couple of years. “It’s a totally different scenario from 1999,” she says.

And of course she’s right in that there are a number of key factors that will make the 2009 media landscape radically different. Not least is the penetration of domestic broadband, which allows digital publishers to deliver on the promises in a way that excitable start-ups couldn’t at the beginning of the decade. Maybe even Boo.com, the online fashion store that famously burned $188m (£106m) in just six months, might have fared better if its technology had actually worked.

It’s also worth noting that big-brand publishers were generally delighted when the world came crashing down on the first wave of internet entrepreneurs. It allowed them to fall back on old ideology and a degree of complacency about the digital world set in that in some cases took several years to shake off. The schadenfreude they showed then certainly wouldn’t be repeated this time around because they have so much more invested in it.

Here’s another big difference. In 1999, the term “search advertising” would have brought puzzled looks from all but the most savvy of media operators. Now it’s worth more than $5bn worldwide and remains the fastest-growing area of online revenue.

The problem for publishers, of course, is that they don’t see much of that cash. And the hopes that online display advertising would close that gap simply don’t seem to be materialising. The buzz word is “accountability”. If you’re a marketer in the current economic climate, it’s much easier to show your finance director the precise benefits from your search-based campaign – you can literally count the clicks – than from brand-awareness campaigns.

Nonetheless, the EIAA’s Alison Fennah still reckons there’s scope for growth in display advertising from at least one big sector: fast-moving consumer goods (FMCG). She says: “The car market for example is quite well-advanced in terms of what proportion it spends online, whereas the FMCG sector, it’s a very small percentage of online spend because they are still learning how to use it.” She cites Dove and Lynx as brands that have made good use of new advertising techniques, and says that other fast-moving brands will catch on soon enough.

For adults in the UK, more than a quarter of their media consumption is now online. Yet FMCG spends just five per cent of its advertising there. All of which offers some hope. But are the big publishing brands in a position to take advantage of any of this growth?

Phillipson thinks they are: “Big portals and publishers can provide great inventory for advertisers,” he says. “They have a much bigger armoury than they ever did. During the Beijing Olympics big newspaper brands were boasting 18-20 million uniques per month. Those are big numbers.”

Matt Brittin, director of Google UK, strikes a more cautious note: “There is a tremendous amount of innovation and I have great respect for Sly and for what other newspapers have been doing to develop online audiences. Their offerings have become more distinctive and more innovative. But the pace of innovation is intense. At Google we struggle sometimes to keep up with the changing pace of consumer demands, so if you’ve a business model that’s historically in a different medium you might find you struggle even more.”

Overall, though, Brittin sees no likelihood of a repeat of the dark days of 2000. “This is the first downturn we have seen where the consumer is digital,” he says. “We don’t know with any certainty what they will do.”

He cites the statistic that more than half of UK shoppers have changed their minds about which brand to purchase after doing research on the internet. The money will surely follow that trend, he reckons. “If you’re not going out, what are you going to do? You’re going to spend more time online.”

Ian Reeves is director of teaching at the University of Kent’s Centre for Journalism, and a former editor of Press Gazette

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