Online advertising dollars moving towards vertical sites

In my role as Zillow’s CFO, I’m frequently asked three questions about the viability of our revenue model:

1. Is there enough advertising money spent on the Internet such that Zillow can really remain free to consumers?

2. Is the housing downturn bad for Zillow?

3. How can a vertical site like Zillow compete with the bigger sites like the online portals (e.g., Yahoo, MSN, AOL)?

The first answer is a simple “yes”.

I’ve addressed the second question here. (Update: our traffic continues to spike – up 30-40% year over year depending upon the week --  as buyers, sellers and agents seek more access to information in these turbulent times.)

I’ve always hypothesized that online advertising budgets will fragment as audiences fragment, that money will follow eyeballs. Just as TV advertising budgets are now highly fragmented across hundreds of stations, internet advertising budgets should also fragment. The internet’s unprecedented ability to help advertisers target certain customer segments should make this fragmentation even more significant online than offline.

 Now we have data to support my hypothesis: according to data from online advertising agency Avenue A| Razorfish (now owned by Microsoft), portals actually LOST 5% of ad dollars:

“Web portals lost 5% of online ad dollars last year to narrower content sites and search engines as spending followed consumers across a more fragmented Web landscape.

That's among the key findings in the annual outlook report on digital advertising trends based on 2007 billings of $735 million. Overall, vertical sites accounted for 39% of spending; search, 31%; portals, 19%; and ad networks, 11%.

Underscoring the continuing shift away from portals to more targeted properties, the agency last year more than doubled the number of sites it bought ads on, from 863 to 1,832.

"We're seeing more ad spending being pushed from the head, which is the portal, down the long tail of sites," said Jeff Lanctot, senior vice president of global media at Avenue A|Razorfish."

Welcome news for sites like Zillow.