False Hopes For Internet Profits (IACI)(GOOG)(TWX)(NYT)(DIS)

Barry Diller, who has been in the media industry as long as almost any man alive, said the online display advertising at his company, IACI (IACI), might be down as much as 50% this month. Disney (DIS) reported that its interactive business lost money in the final quarter of last year. The head of advertising sales at Time Warner’s (TWX) AOL internet unit was replaced, probably a reasonable sign that revenue is under-performing there.

At The New York Times (NYT) where income from NYT.com has to do well because the newspaper is losing sales so fast, online revenue fell at a faster pace than print revenue did in December.

The prevailing theory about internet display advertising and e-commerce is that they would replace TV, newspapers, and magazines as the most efficient way to reach consumers. Online advertising could target people based on their interests and habits. The number of hours people spend on the internet compared to time spent doing things like watching TV has gone up every year for almost a decade.

This recession was online advertising’s big test. The internet, which is the most efficient medium, was supposed to outperform all of the others when budgets shrank. The oldest media businesses were supposed to perform worse with each downturn in the economy.  The common assumption was that, over time, online advertising would eventually get 20% of all marketing dollars spent in the US.

The recent past had made believers out of many marketing analysts, until this year. In 2007, online advertising rose 26% to $21 billion. By most estimates, that growth rate dropped well below 20% last year and could fall to under 15% this year. These figures include search advertising which is dominated by Google (GOOG). It is still the most efficient online method for reaching customers, so if search revenue is removed from the analysis, internet display sales may already be falling.

All recent information indicates that the internet is not going to to be the great savior of major media companies, at least not anytime soon. The management teams at these companies have believed that as their customers moved online to get access to news, sports information, entertainment, video, and advice, that advertising dollars would follow. As consumers started to view movies on the internet instead of in theaters all of the money from the old model could be replaced and then some, because people would be willing to pay for the convenience of watching a movie online. In the case of newspapers, if they were eventually destroyed, they would be viable again on the internet.

Recent figures from media companies show that their online businesses are performing poorly as the recession worsens. The job of making money from premium content becomes even more difficult. There may be a simple reason for this. Almost everything on the intenet is free, even The New York Times. People get used to that. If those consumers coming online to see free content aren’t substantially more appealing to advertisers than people who read magazines or watch TV, the entire system that has been created to make money on the next generation of content delivery won’t work.

It is as if car companies still had to compete with bicycle manufacturers. The auto business is tough enough already.

Douglas A. McIntyre30