European online advertising through 2013

For Interactive Marketing Professionals

February 4, 2009
European Online Advertising Through 2013
Search Will Fare Best In A Recession As Channel Shift Accelerates
by nate elliott
with Mark Mulligan, Tushi Banerjee, and Angie Polanco

ExECUT I v E S U M MA Ry
As the economic recession starts to bite into advertising budgets, growth in online advertising will
slow: European online ad spending will grow just 10% in 2009, down from 30% annual growth in 2007.
Search will fare best as interactive marketers focus on highly accountable direct response advertising,
while display advertising will be hardest hit in this recession just as it was in 2002. Rich media and video
advertising will grow to account for 59% of European online display ad spending in 2013 as marketers
of all types embrace richer creative formats to improve the performance of their display ads. To prosper
during the downturn, interactive marketers should look for value in highly targeted display ads and seek
opportunity in the improved performance of contextual ad networks like Google’s AdSense.

THe recession will acceleraTe THe exisTing Trends in online adverTising
Since our last forecast was published in December 2007, the economy has slipped into a recession, and
many advertisers’ priorities have changed considerably. 1 As a result, we’ve undertaken a significant
review of our previous assumptions. However, most of the fundamental market drivers we saw in 2007
remain in place, and in many cases, the largest difference between this model and our past models is that
the pace of existing trends has accelerated.

Paid search will Fare Best as The recession drives online’s share of ad spending
Over the past four years, the annual growth rate of European online ad spending has declined
significantly, paid search has continually taken share from display advertising and online classifieds, and
online’s share of the total ad market has grown steadily. All of these key trends will gather speed in a
down market (see Figure 1):

· We’ve reduced the rate of growth in our forecast to account for the impact of the recession. Our
last model forecast that online ad spending in Western Europe would grow at 13% compounded
annually through 2012. We’re now forecasting that the market will grow at 9% compounded
annually through 2013. The biggest difference is in 2009, when we believe that lower overall ad
spending will slow online ad growth to 10%, versus the 14% we had previously forecast. We’ve
lowered our forecast’s annual growth rates in 2010 and 2011, as well. We now believe the online ad
market in Europe will reach €14.8 billion in 2013.

· As the recession bites and marketers look for results, search will suffer least. The economy
will force interactive marketers to prove that their ad spending is generating a positive return
on investment (ROI), and search’s pay-per-click model and relatively high conversion rates will

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European Online Advertising Through 2013 2

continue to attract new spending in a bad economy, just as it did in a good economy. As a result,
paid search advertising — which accounted for 49% of European online ad spending in 2008 —
will continue to grow faster than any other online ad format over the next five years.

· Display advertising will be hurt, though not as badly as during the last recession. The European
online display ad market suffered during the last recession — falling from €886 million in 2001 to
€862 million 2002 — while paid search spending nearly doubled during the same period. Advertisers
have told us that they’re more likely to cut spending on display ads than on other formats this time
around as well, so we’re expecting display advertising to bear the brunt of the recession in 2009.
However, display advertising is in a better position now than it was in 2002: A greater percentage
of display spending is now dedicated to direct response marketing, and ad prices aren’t as inflated
now as they were in the years leading up to 2002. As a result, we expect display ad spending to grow
throughout the forecast period — by 4% in 2009, growing to 10% in 2013.

· A bad economy will drive faster-than-expected channel shift. Although the recession will
cause online ad spending to grow more slowly than we had previously forecast, it will actually
increase the Internet’s share of total ad spending. Just as search’s relatively high conversion rates
and accountability will help it outperform other forms of online advertising in a bad market, the
largely direct response nature of Internet advertising generally will help it to further outperform
offline ad channels during the recession. We had previously forecasted that online ad spending
would account for 12.6% of all European ad spending in 2012; thanks to the recession, we’ve
increased that forecast to 14.8% of all ad spending in 2012 and 15.1% in 2013 (see Figure 2).

February 4, 2009 © 2009, Forrester Research, Inc. Reproduction Prohibited


Figure 1 Search Will Continue To Dominate As Online Ad Growth Slows

€15
Classiﬁeds
€12
Display
€9
(€ billions)
€6
Paid search
€3

€0
2007 2008 2009 2010 2011 2012 2013
Paid search €3.9 €4.8 €5.6 €6.2 €6.9 €7.5 €8.1
Display €2.7 €3.0 €3.1 €3.4 €3.7 €4.0 €4.4
Classiﬁeds €1.8 €1.9 €2.0 €2.0 €2.1 €2.2 €2.2
Total (€ billions) €8.4 €9.7 €10.7 €11.6 €12.7 €13.7 €14.8
Western European ad spending
Source: JupiterResearch Internet Advertising Model (12/08)
53743 Source: Forrester Research, Inc.

Figure 2 Recession Will Accelerate Advertising’s Shift To Online

16%
14%
12%
10%
8%
6%
4%
2%
0%
2007 2008 2009 2010 2011 2012 2013
Online’s share of Western European ad spending



The UK, germany, and France account For Two-Thirds of european online ad spending
Although small early-adopter nations like the Netherlands and the Nordic countries have seen
online ad spending grow quickly in recent years, the largest European markets still dominate ad
spending (see Figure 3):

· Advertisers give a disproportionate share of spending to the largest markets. The three
largest markets in Western Europe — the UK, Germany, and France — continue to dominate
European online advertising, receiving 66% of Western European online ad spending. The UK
alone accounts for nearly one-third of online ad spending in Europe. This dominance will only
continue: According to our European online ad forecast, these countries’ share of spending
will remain consistent through 2013, by which time all three will see a significantly higher-
than-average share of their markets’ overall ad spending going online. France will see especially
strong channel shift over the forecast period as new rules restricting advertising on popular
state-owned TV channels will push more ad spending to the Internet.

· The Netherlands and the Nordic markets have moved farther up the food chain. Online ad
spending in small but highly-developed markets like Denmark, the Netherlands, Norway, and
Sweden have grown quickly in the past few years, and each country now boasts a larger online
ad spend than more populous online markets such as Spain. The Nordic markets, in particular,
have seen strong growth in paid search spending over the past few years as major search engines
have increased their presence and marketers have started to become more sophisticated in their
search marketing tactics.2

· Southern European online ad markets still suffer from low user engagement. All of our
European consumer surveys tell us that Southern European online users have traditionally been
much less engaged with the Internet than Northern European users. Spanish and Italian users, for
instance, are less likely than most other Europeans to use social networks or search engines, and
the average time spent online in Italy has actually fallen in recent years. Our ad model shows that
as a result, the four Southern European markets — Greece, Italy, Portugal, and Spain — have the
lowest online ad spend per online user, each less than one-half the European average.



Figure 3 The UK, Germany, And France Account for 66% Of European Online Advertising

2008 Western European online ad spending by country (€ millions)
UK €3,099
Germany €2,138
France €1,158
Italy €506
Netherlands €501
Norway €440
Denmark €411
Sweden €399
Spain €340
Switzerland €149
Belgium €144
Finland €108
Austria €107
Portugal €72
Greece €69
Ireland €62
Luxembourg €7


video and rich Media will continue To grow in importance
Advertisers continue to report some difficulty in running rich media and video advertising online,
most notably in the production and trafficking processes. However, these formats will grow to
account for the majority of European online display ad spending over the next five years as advertisers
increasingly focus on strategies to improve the performance of their online branding campaigns:

· Video will grow faster than any other display ad format. Advertisers’ use of online video ads
has grown quickly in recent years, and we expect to see even greater adoption in the future (see
Figure 4). According to our most recent European advertiser executive survey, nearly half of
European online advertisers and agencies say that they’ll buy video banners in the next year, and
almost a quarter say the same thing about pre-roll ads. As a result, online video ad spending in
Europe will more than quadruple — from €239 million in 2008 to €986 million in 2013. By the
end of the forecast period, video ads will claim 22% of European online display ad spending and
act as the primary reason display advertising outgrows paid search in 2012 and 2013.

· Text ad spending will tail off as graphical AdSense ads become more popular. Spending on
text-based display ads grew 22% in 2008 as Google’s AdSense network continued to attract a
larger share of European advertisers’ online budgets. However, we expect that growth to decline
as advertisers give less of their online ad budgets to display advertising in 2009 and 2010, and as
advertisers start running more graphical and rich media ads on the AdSense network in later years.



Figure 4 Video And Rich Media Will Take 59% Of Display Ad Spending In 2013

Online’s share of Western European ad spending

€4,500
Image
€3,600
Video
€2,700
(€ millions) Text
€1,800

€900 Rich media

€0
2007 2008 2009 2010 2011 2012 2013
Rich media €650 €789 €927 €1,086 €1,249 €1,432 €1,634
Text €646 €790 €830 €893 €977 €1,073 €1,183
Video €155 €239 €323 €434 €606 €797 €986
Image €1,291 €1,186 €1,058 €946 €828 €708 €608
Total (€ millions) €2,742 €3,004 €3,138 €3,359 €3,660 €4,010 €4,411
Source: JupiterResearch Internet Advertising Model, Q4 2008

R E C O M M E n D AT I O n S

sMarT adverTisers sHoUld looK Twice aT neglecTed oPPorTUniTies
With markets in Europe and worldwide sliding into recession, online advertising budgets will grow
slowly, and advertisers will be forced to justify their budgets more than at any other time in the past
five years. As times get tougher, interactive marketers should employ the following strategies:

· look for value in display advertising — and use targeting to help. While it’s still possible
to find good-value paid search keywords in Europe — especially in relatively less-developed
markets like the nordic countries — advertisers’ continuing preference for search over the past
several years has driven click prices ever higher. Meanwhile, the explosion of social media has
ensured that there’s plenty of low-price display ad inventory available. Rather than abandoning
display advertising in tough times, as many marketers have told us they will do, we encourage
advertisers to look for good-value display ad opportunities. Improvements in ad targeting from
ad servers and publishers — especially social networks like Facebook and MySpace.com — will
drive response rates up, while a drop in demand for display advertising should drive CPMs
down. Overall, we think display advertising is likely to offer excellent value over the next year.



· reconsider contextual ad networks. Advertisers have long understood that contextual ads
such as those in Google’s AdSense program don’t perform as well as the pure paid search
listings that Google and other search engines offer. As a result, according to our 2008 online
advertiser executive survey, only 42% of European advertisers use contextual ads, compared
with 71% who use paid search. However, many advertisers have anecdotally reported
that the quality of clicks from AdSense and other contextual ad programs has increased
significantly in recent years. Additionally, we expect these networks to perform ever better as
Google increasingly leverages the advanced targeting tools it acquired with its DoubleClick
division and as other search engines likewise integrate their recent technology acquisitions.
Advertisers that have been disappointed with contextual advertising in the past should re-
examine this option.

endnoTes
1
Our previous online ad forecast predicted faster growth across the European online ad market in 2008,
2009 and 2010. See the December 19, 2007, “European Online Advertising Forecast, 2007 to 2012”
JupiterResearch report.
2
Nordic interactive marketers, as relative newcomers to paid search, are still less likely than other European
marketers to use advanced tactics like geographic targeting, landing page optimization, and advanced
keyword research. However, the Nordic marketers and agencies we’ve spoken to lately report that the
region is becoming more sophisticated in the use of these strategies. See the September 26, 2008, “Search
Marketing in the Nordics” JupiterResearch report.

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more information, visit www.forrester.com.
© 2009, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions
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European online advertising through 2013

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