By Lauren Berry and Crayton Harrison
Oct. 16 (Bloomberg) -- Google Inc. and Yahoo! Inc. can't shrug off the slowing economy anymore, as advertisers are forced to extend their budget cuts to Internet promotions.
The credit crisis may cost the online-advertising industry $6.7 billion in lost sales through 2010, according to Collins Stewart Plc. Customers large and small, from General Motors Corp. to Simplexity LLC, are scaling back ad spending, while financial companies such as Wachovia Corp. are disappearing altogether.
The reductions will drive growth in U.S. Internet ad outlays to less than 20 percent next year for the first time since 2002, says Collins Stewart analyst Sandeep Aggarwal in San Francisco. That would crimp sales growth at Google and derail the turnaround of Yahoo, two stocks that have already lost about half their value this year.
``Growth is coming down,'' said Aggarwal, one of at least eight analysts trimming their share-price estimates on Google this month. ``The weakness is happening in search and display advertising and everywhere.''
Advertisers will spend $43.6 billion this year worldwide on online spots -- the text links that run next to search results and the ``display'' banner and video promotions on Web pages -- down from a previous estimate of $44.4 billion, he said.
He also reduced 2009 and 2010 estimates, saying the credit crunch and slack consumer confidence would convince advertisers to hold back.
`Just Pain'
Online advertising will remain a growth industry, especially for search-linked ads, said Geoff Ramsey, chief executive officer for research firm EMarketer Inc. in New York. Customers find they can measure the effectiveness of such ads more precisely than with television or newspapers, he said.
TV and newspaper ads already face declines, according to Barclays Capital. The firm lowered its forecast for broadcast TV networks to a 2.5 percent decrease in sales this year and dropped its outlook for newspapers to a 16.5 percent decline in 2008.
Yet the credit crisis and slowing demand for everything from financial services to cars has forced companies to curb spending on all types of ads, including Web spots, Ramsey said.
``There is not one category that I can think of that won't be in some way impacted by this, and that's just the pain we're going to have to go through,'' Ramsey said.
Google, owner of the most popular Internet search engine, may say today that third-quarter net income climbed 23 percent to $1.32 billion, or $4.12 a share, according to a Bloomberg survey of 24 analysts. That's down from 35 percent growth in the previous quarter. Before some items, profit probably was $4.78.
Sliding Stocks
Sales growth probably fell to 34 percent from 43 percent, minus revenue from partner sites, and has slowed every quarter since the third quarter of 2005, a year after Mountain View, California-based Google sold stock.
Yahoo, owner of the No. 2 search service, may say net income dropped to $110.3 million when it reports Oct. 21, or 8 cents a share, the survey showed. Sales excluding revenue shared with partners probably rose 7 percent to $1.37 billion, increasing at the slowest pace since 2002. Excluding some costs, profit may have been 14 cents.
Diana Wong, a spokeswoman for Sunnyvale, California-based Yahoo, and representatives for Google didn't return calls and e-mails seeking comment.
Google, down 51 percent in 2008, fell $23.54 to $339.17 yesterday in Nasdaq Stock Market trading. Yahoo, which rejected an acquisition offer from Microsoft Corp. this year for as much as $33 a share, dropped 90 cents to $11.75 and is down 49 percent.
Finance, Autos
In July, Google CEO Eric Schmidt said sales growth had ``held up well despite uncertain economic conditions.'' The same month, Yahoo Chief Financial Officer Blake Jorgensen said he didn't expect a significant change in the company's growth during the remainder of the year.
Since then, the financial crisis forced Wachovia into an emergency sale and Washington Mutual Inc. into bankruptcy. That eliminated two large online-ad buyers, said Jim Safka, CEO of Oakland, California-based search engine Ask.com.
Financial firms spent $1.5 billion on U.S. online ads in the first half of 2008, little changed from the year-earlier period, according to the Interactive Advertising Bureau, an industry group in New York. Retail spending was unchanged at $2.4 billion, and auto companies paid $1.4 billion, up from $1.1 billion.
GM is re-evaluating its ad spending as sales cool because it is more difficult for buyers to get loans. The company, which halted its sponsorship of the movie industry's Academy Awards and TV's Emmy Awards this year, had planned to spend as much as half of its $3 billion annual ad budget on online spots by 2011, Barclays said. GM spokeswoman Kelly Cusinato declined to comment.
`Everyone's Cutting'
``I don't think that we'll see another category that's going to increase enough over the year to replace those budget cuts from the automotive and financial sectors,'' said Jeff Lanctot, strategy chief at Seattle ad firm Avenue A/Razorfish, owned by Microsoft. ``You have whole companies taken out of the mix and everyone's cutting.''
Yahoo may be hurt more because the company gets a greater portion of sales from display advertising, images such as banner ads on Web sites. Prices are falling because of a trend in the way Web sites sell ad space, Barclays said. Instead of working directly with advertisers, sites pool their ad space in so- called networks and exchanges, automating the process.
Google gets almost all of its revenue from ads that run next to search results. Advertisers find those more effective than images in producing immediate sales, said Dave McRae, president of marketing agency Purple@Epsilon in Dallas.
`Hunkered Down'
At Reston, Virginia-based Simplexity, which handles online mobile-phone sales for companies such as RadioShack Corp., CEO Andy Zeinfeld cut ad spending more than 10 percent in recent months. He is now focusing on Web-search ads for specific deals, such as a new phone, instead of ads simply promoting the Web site. The ads he is buying are often cheaper, he said.
``This isn't the time to be out bragging; this isn't the time to be out building new brands,'' Zeinfeld said. ``This is a time to be hunkered down and making sure every decision you're making is both with the customer in mind and with profitability in mind.''
To contact the reporter on this story: Lauren Berry in New York at lberry4@bloomberg.net; Crayton Harrison in Dallas at tharrison5@bloomberg.net.
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