On the Web, display ad business falters while online search stays strong

Display ads are hurting while online search ads remain strong, the New York Times reports today. Specifically, PubMatic, an advertising-technology company in Palo Alto, CA that runs an online-pricing index, found the prices paid for online ads bought through ad networks dropped 23% from March to April 2008.

This drop in pricing has hurt some companies' results:

• Time Warner Inc. (NYSE: TWX)'s AOL, parent of BloggingStocks, saw an 18% decline in display advertising revenue to $191 million.
• The New York Times' (NYSE: NYT) Internet ad revenues increased 16%; a year earlier, though, they increased 20%.
• WebMD Health (NASDAQ: WBMD) revised down its 2008 revenue guidance to a range of $380 million to $395 million, from a range of $395 million to $415 million thanks to lower expected ad revenues.

The good news? Surprise! -- Google Inc. (NASDAQ: GOOG). In the most recent quarter, Google had a profit of $1.31 billion on revenues of $5.19 billion. Its United States revenue was up 30%. The reason is that display ads don't offer a tangible payoff to advertisers whereas search ads do.

Advertisers are simply trying to maximize their returns on the advertising investment (ROAI). If someone comes along and offers a higher ROAI than Google, advertisers will switch to that provider. Meanwhile, those stuck with display advertising will suffer at Google's hands.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.