America Online (AOL) has announced a $435m deal to acquire online marketing firm Advertising.com, a resounding vote of confidence in the Internet advertising market that many had until recently written off for good.
The acquisition is the first significant one made by AOL since the ill-fated takeover of Time Warner in 2000.
Advertising.com buys advertising space from Web sites and search engines and packages it up for clients wanting to reach certain demographics. The company then sells to advertisers on a performance basis, which means they pay only according to the volume of responses or leads.
The online advertising market collapsed after the peak of the dotcom frenzy in 2000, leading many to question whether the advertising-based model was viable.
The market has been showing signs of life as marketing managers begin to redirect cash towards online advertising. Media buyer Universal McCann recently forecast that Internet advertising would grow by 20 per cent this year to $6.8bn in the US, making it the fastest growing medium.
"Online advertising is back," said AOL Chief Executive Mr Jonathan Miller on Thursday. "Over the past two years we have seen a rebirth of online advertising. Major advertisers are coming more and more to the web and spending more and more of their marketing money online."
In the first quarter of this year, AOL recorded advertising revenues of $214 million. The figure was down 5 per cent on the same quarter a year earlier, but AOL has now recorded two successive quarters of back-to-back growth.
In the fourth quarter of 2003, it had revenues of $204 million. The performance is still far from the peak of 2000 when AOL was posting advertising sales of $700 million a quarter.
The company is working through some of the deals signed by big name advertisers during the boom. It needs to sell a couple of hundred million dollars of advertising this year just to replace long-term contracts coming to an end.