A surprise revenue warning by Yahoo Inc. has marketers, media buyers and internet companies scrutinising the health and future of online advertising, which has grown at the expense of newspapers.
Yahoo said it saw weakness in advertising from automobile and financial firms, catching a number of media analysts by surprise with its comments and sending the internet media company's shares down 13 per cent.
The warning raised concerns over whether the issue was solely Yahoo's, or if it heralded a wider slowdown in online ad spending.
"Given the sheer size and reach of Yahoo, the news is quite concerning," Merrill Lynch analyst Lauren Rich Fine wrote in a report after Yahoo said third-quarter revenue would likely be at the bottom half of its forecast range.
Mr Fine said it was unclear whether an overall slowdown was to blame or "other possible reasons such as Yahoo's own market share loss, marketers choosing to spend at less expensive properties, or marketers choosing more targeted online advertising options."
Yahoo itself said the weakness was a new trend, only weeks old, and that it did not yet know if it suggested a broader slowdown.
"It is possible that the pullback Yahoo is experiencing is related to short-term economic conditions and not the online advertising industry as a whole, however we will reserve judgment," Scott Devitt, an analyst at Stifel Nicolaus, said in a research note.
Until Yahoo's warning, signs pointed to sharp growth for online ads at the expense of newspapers and radio, and internet spending has dominated the outlook for advertising.
Nielsen Monitor-Plus said in a report this month that internet advertising rose nearly 50 per cent during the first half of the year.
Competition for advertising dollars from Google Inc. the web search leader, or hot internet properties like online video-sharing site YouTube Inc. gives one reason to believe the problem is Yahoo's.
Yahoo might also be more reliant than competitors on advertising from the auto and financial sectors. Lehman Brothers analyst Douglas Anmuth has estimated that nearly 18 per cent of Yahoo's revenue could be exposed to a potential slowdown in those two sectors.
A slowdown in spending by auto companies has been anticipated given the problems faced by Ford Motor Co., General Motors Corp. and DaimlerChrysler's US unit, Chrysler Group.
Digitas Inc, an internet marketing agency, in July lowered its revenue guidance for 2006 partly because of spending cuts by GM.
TNS Media Intelligence estimates that GM cut its overall ad budget by 17 per cent in the first half of the year.
Weak advertising spending by financial services was more surprising, although some attribute it to a slowdown in the mortgage business, while others say it was natural given the sector has been one of the biggest internet spenders.
Whether Yahoo's warning portends things to come for Internet advertising remains to be seen. For now, Denise Garcia, an analyst at WR Hambrecht & Co., says a slowdown in auto and financial services spending should not be taken as a signal of broader advertising cuts.
"We believe that two sectors do not represent advertising activity across the board and expect online advertising growth to remain robust this year at 29 per cent year-over-year growth despite what may appear to be a soft quarter for Yahoo."