As Internet Ad Revenue Growth Slows, Yahoo! (YHOO) Deal Looks Worse

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All the thumb-sucking champions of internet ad growth were probably cheering when they saw that online marketing revenue jumped 25% last year to $21 billion. But, that was much less than the 35% growth in 2006. Even in absolute dollars, last year was up $4.2 billion and 2006 was up $4.3 billion according to The Wall Street Journal.

If internet ad revenue grows another $4.2 billion in 2008, the rate of increase drops to 20%. That does not take into account the recession, which may already be under way. Ad spending is one of the first things companies cut in a downturn. That means that no one should be surprised if internet marketing spending is up only 16% or 17% in 2008. The rate of growth might recover in 2009, if the economy does.

Large web portals like Yahoo! (NASDAQ: YHOO), AOL, and MSN have had a particularly rough time of it. Their annual revenue increases have been lackluster, perhaps because they do not target audiences as well as more niche sites. They hope to improve this by using technology from the ad serving companies, like DoubleClick, which the largest internet portals have snatched up at huge premiums.

New targeting features may work, but they come to market in the teeth of a sharply slowing economy.

As Microsoft (NASDAQ: MSFT) contemplates whether it should raise its bid for Yahoo! these numbers are not lost on Redmond. Perhaps they will just pull their offer and watch Yahoo!’s shares fall to under $20. With internet ad growth moving sharply down, Yahoo! may be available for $15 sometime around the middle of this year.

Douglas A. McIntyre