By Kim Tong-hyung
Staff Reporter
Increasing economic turmoil may squeeze the profits of Internet companies, who are bracing for declines in advertisements and paid clicks.
Daum Communications, the operator of the country's second biggest Internet portal, Daum (www.daum.net), reported stalled growth in its sales from search advertising in the third quarter and provided a grim forecast for the fourth quarter and beyond.
The company is predicting an annual decline in its sales from display advertisements, including Web banners, which dropped 14 percent year-on-year to 19.2 billion won (about $14.5 million) in the third quarter, and also expecting diminished returns from cost per click (CPC) advertisements.
Display advertisements and CPC advertisements accounted for about 57 percent of the 67.3 billion won revenue Daum posted in the third quarter, which represented a slight drop from the 67.5 billion won in the previous quarter.
``We are expecting annual declines in sales of display and CPC advertisements and it's very difficult to tell how the market will play out next year,'' said Kim Dong-il, Daum's chief financial officer, in a conference call Thursday.
``The Beijing Olympics this year proved to be less of a money maker for us compared to the FIFA World Cup in 2006 and the presidential elections last year. We did experience growth in Web traffic, but we think it will take a little time for business queries to catch up,'' he said.
Daum is unlikely to be the only Internet company negatively affected by slower growth in online advertisements. NHN, the operator of www.naver.com ― kingpin of the Korean Internet industry and the country's top portal ― is expected to post its first quarterly loss in revenue Friday since being listed on the stock market in 2002.
Park Jae-seok, an analyst at Samsung Securities, forecasts a third quarter revenue of 294 billion won for NHN, falling from 304.7 billion won in the second quarter. The company's revenue display advertisements will drop 7.5 percent from the previous quarter to 32.9 billion won, Park said. Online advertising accounted for about 67 percent of NHN's revenue last year.
So much for the theory about the online advertisement market being recession proof.
``It's hard to tell right now if sales will start picking up from the first quarter of next year or the decline in advertisement revenue will continue,'' said Daum's Kim.
``The degree of change in the market in recent months was beyond our imagination, but it seems clear that it will be difficult to expect a significant increase in revenue next year,'' he said.
Daum is trying more urgently to create new sources of revenue beyond searches and advertisements, and plans may include tapping into a market shown to be passive in the past ― online games.
There are rumors within the industry that the company is considering forming a strategic alliance with NCsoft, the country's biggest online game publishers.
In the conference call, Daum chief executive Seok Jong-hoon declined to confirm the speculation, but admitted that online games remain a crucial part of future business plans. The company is also planning to introduce a new online map service by the end of the year and plans to deliver more services for data-enabled mobile phones.
The economic downturn has been in addition to increased regulatory risks, with the Korea Communications Commission (KCC) looking to impose stricter control on user-generated content and online games.
In a meeting with the heads of NHN, Daum, SK Communications and Yahoo! Korea, KCC chairman Choi See-joong downplayed the worries of increased regulations but also called for Internet companies to better control their content.