Despite cries that online ads don’t work, spending for Internet advertising will continue to grow at a furious pace. In a Report to be issued next week, Forrester Research, Inc. (Nasdaq: FORR) estimates that global spending for online advertising will reach $33 billion by 2004, one-third of which will be spent outside of the US. The increase in spending will come from several sources, including the reallocation of dollars from traditional media.

“Spending for online advertising is being driven by a self-perpetuating cycle,” said Charlene Li, senior analyst in New Media Research at Forrester. “As the online audience continues to grow and eCommerce accelerates, more and more marketing dollars will be drawn to the Web. These trends will be enhanced by the arrival of new technologies that improve the accountability of Web advertising.”

Forrester projects that US online ad spending will grow from $2.8 billion to $22 billion by 2004. This figure represents 8.1% of projected expenditures for traditional advertising — exceeding magazine, yellow pages, and radio spending. The compound annual growth rate for Web advertising will be 51% over the next five years, roughly tracking the growth of online retail. Meanwhile, higher consumer usage of the Web will create excess ad inventory, lowering CPM rates and making Web advertising more cost-effective and accessible to new marketers.

Although increased ad spending would seem to give content sites leverage in the ad selling process, page view growth will far outpace ad spending growth. With new ROI tracking tools and plenty of ad inventory available, marketers will increasingly demand performance-based deals. By 2004, Forrester predicts that 53% of US online ad spending will be based on performance.

Over the next five years, the Internet will siphon $27 billion — or 10% of all US ad spending — away from traditional media. This reduction will occur through a combination of direct transfers of dollars, downward pressure on pricing, and the emergence of new ad forms for devices like interactive TV and cellular phones. While all forms of traditional media will experience slower-than-expected growth, newspapers and direct mail will be the most affected, losing as much as 18% of their expected revenues in 2004.

Outside the US, online ad spending will increase from $502 million in 1999 to $10.8 billion in 2004, capturing 33% of global spending. Worldwide markets will grow at a sustained, faster rate because they will start from a smaller base and learn from the US experience. In Europe, online ad spending will total $5.5 billion in 2004, representing 5.1% of Europe’s ad spending. The Asia/Pacific nations will spend an additional $3.3 billion, representing 6% of traditional ad spending in the region. Latin America will grow to $1.6 billion in 2004, or 4.8% of regional spending.

“One of the most interesting developments we expect to see over the next five years is the rise of multinational portals,” added Li. “The law of ‘the big get bigger’ applies tenfold to the Internet. Beyond the obvious economies of scale, international network sites provide an easy regional buy for global marketers.”

For the Report “Internet Advertising Skyrockets,” Forrester drew upon interviews with 50 online and offline marketers, publicly reported revenues of Internet companies, and Forrester Technographics® data about consumers’ online usage. This information was then used to create a model that projects the growth of Internet advertising over the next five years. The model’s projections were adjusted downward to account for noncash advertising revenues including barter ads, revenue-sharing, and intra-industry spending.