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What's next for the Internet ad sector
The industry had a great first quarter. Here's how investors can take advantage of the good news.
May 26, 2004: 1:55 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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SAN FRANCISCO (CNN/Money) - Talk about a great way to kick off a meeting.

When the Ad Tech conference opened on Monday morning in San Francisco, attendees got a little manna with their continental breakfast: A new report by the Interactive Advertising Bureau found that the first quarter of 2004 was a record-breaking one for the Internet advertising sector, with $2.3 billion in revenues, up 3.9 percent from the fourth quarter and an astounding 38.9 percent from the year-earlier period.

"The prevailing vibe out here is that everyone is having a pretty good year," says Charles Buchwalter, vice president for analytics at Nielsen/NetRatings, who spoke to me from the show. "It's hard to find negative things to say about the online advertising market in 2004."

And after the down years the sector experienced in 2001 and 2002, maybe it's earned its moment in the sun.

Can investors get in on it?

So is it too late for investors to get in on the gains? No. In fact, I believe the sector's growth will continue for quite some time as we see the alignment of several key factors -- some conceptual, some strategic, and some technical.

Let's look at the reasons for the sector's success and then look at what investing opportunities might still exist.

At the conceptual level, advertisers both large and small have finally accepted the Internet as a fundamental piece of their ad buys.

"You've got to be crazy not to meet your consumer [online]," Buchwalter says. "[Advertisers] know they have to be online."

It's not just dot-com and tech companies buying up ads either. More and more traditional companies now see the strategic advantage that online advertising provides them.

A study that Ford Motor recently did with Marketing Evolution and the Advertising Research Foundation found that the automaker was able to reach 43 percent of its audience online in one day, a feat almost impossible to match in print or radio.

Nielsen/NetRatings just released a study showing that large traditional companies jumped online in the first quarter, with AT&T Wireless, DaimlerChrysler, MBNA, Safeway, and Schering-Plough increasing their ad buys by an average of 674 percent from a year ago.

Gains and opportunities

On a technical level, the online advertising industry has made great gains in standardizing its formats, which makes it much easier and more cost-effective for companies to advertise online. Greg Stuart, president of the IAB, says the industry is finally moving toward the four standard display-ad sizes his organization proposed nine months ago.

"Marketers used to think it was too complicated to buy online ads because a campaign that ran on 20 different sites often required 20 different-size ads," he says. "That's time-consuming and costly."

As for investing opportunities, many of the people I spoke with pointed to display ads. Much of the investment frenzy right now centers on keyword search, thanks to the impending Google IPO and strong performance from companies such as Yahoo! and Ask Jeeves.

"Paid search alone drove online marketing last year," says Nate Elliott, an analyst with Jupiter Research. "But the sectors are going to grow in harmony this year."

DoubleClick Incorporated

Despite tepid growth in the last quarter, display ads should continue as the leading category for online spending, according to Jupiter, with $3.6 billion expected to be spent on the category this year, up from $3.1 billion in 2003. Paid-search advertising is expected to reach $2.1 billion this year, up from $1.6 billion in 2003.

Investors might want to revisit display-ad companies such as DoubleClick (currently trading near its 52-week low) and 24/7 Media, which is still trading well below its target price, despite a "strong buy" rating from 75 percent of the analysts covering the company.

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