We all know how strong digital growth is in the U.K., but the latest figures show an unprecedented level of confidence that's got traditional advertisers running scared. Danny Meadows-Klue reads between the lines of the figures in part one of his feature length examination.

This month's figures from the Internet Advertising Bureau and PricewaterhouseCoopers confirm the switch to online continues to accelerate in Europe's lead media market. The internet's share of all advertising swelled to almost 15 per cent in the first half of 2007, with further record-setting leaps in real growth. Boosted in particular by massive increases in the supply of media from social networks and the continued switch of acquisition budgets into search, the wider media sector is starting to feel the real impact of the digital networked economy as the models that underpin many print and broadcast players get called into question.

As Digital Strategy's team forecasted, online ad spend growth held steady at above 40 per cent year on year, giving the largest quarters and rises in the history of the medium, and forcing the TV and magazine industry into panic and to issue statements in defence of classic channels.

• First half of 2007: £1,334.3 million
• First half of 2006: £917.2 million
• Year on year growth: 41.3 per cent
• Online ad spend market share: 14.7 per cent

With the U.K. market acting as a key indicator for European online ad spend behaviour, the results will boost stock prices for Continental firms looking for models of their own country's digital economy several years down the line. The research is particularly accurate because it relies on publisher revenue declarations (under non-disclosure agreements to PricewaterhouseCoopers), and is one of the only markets in the world to include a revenue declaration from Google.

Topline growth hides turmoil
Overall the U.K. ad market faired well, up 3.1 per cent to £9.1bn in the first half of 2007, but this disguised the dramatic churn and channel switching among media that has made it the most turbulent and unpleasant of times for many media owners. In press classified advertising, volumes continue to haemorrhage under the combined onslaught from the CraigsList free ad model, new pay-by-results engines such as Oodle, disintermediation as advertisers deal direct, the small business engines within Ebay and the inescapable Google effect. Television's increasingly shaky ground has become apparent, with many consumer brands we spoke to now talking frankly about switching campaign budgets to the web as audience reach stumbles but, worse, ad effectiveness falls faster. Media fragmentation, marketing savvy audiences, and massive changes in consumer behaviour are all impacting faster than most media groups can hope to adapt, paving the way for polarisation in profits and digital audiences. As Digital Strategy has been predicting since 2003, when the shake-out comes it will be larger and more brutal than most classic media (or their shareholders predict).

Direct mail passes the crown
Today's statistics also confirm Digital Strategy's forecast that online would leap over direct mail in the Spring of 2007. Direct mail's market share continues to fall (currently 11.8 per cent), and will suffer much deeper cuts as more customer acquisition budgets switch to Google and Yahoo. Remember that none of the cash invested in email relationship marketing (those billions of customer emails sent daily) is counted in the advertising figures because there's no media-buy involved. Add to that the massive investment most firms have now made, or at least have begun to make, in their own web presence, and a much starker picture emerges -- marketing has gone digital, and advertising is just part of that story.

Classifieds set to beat display
Take a look at these latest results:

• Online classified advertising: up 72 per cent year-on-year
• Market value for period: £277.7m
• Market share within online 20.8 per cent
• Online display advertising: up 33 per cent year-on-year
• Market value for period: £287m
• Market share within online 21.5 per cent

As always, recruitment tops the classified charts, but the growth in automotive and property reflects a bitter impact felt in the regional press and magazine sectors, as ad dollars follow audience eyeballs.

Display's share may only be a fifth of all spend (21.5 per cent), but embedded formats (such as banners and skyscrapers), all rose at a faster rate than any non-digital channel, with the interruptive out-of-banner formats (including an umbrella of rich media technologies) continuing to deliver strong performance for advertisers in the hands of a much larger digital creative community.

Given the much lower typical advertising rate for an online classified ad, the leap in spend may seem a paradox, but our tracking suggests online will edge above display in the latter part of 2007, before the 2008 arrival of IPTV ad format revenues changes the model for media yet again.

Search is unstoppable

• Search advertising: up 44 per cent year-on-year
• Market value for period: £762.3m
• Market share within online 57.1 per cent

The advertising switch to search is now deep in a positive feedback loop that looks unbreakable. Massive search revenues from Google and Yahoo! (and expected at MSN), are fuelling product development and acquisition on a scale never before seen in media. This is recasting the media landscape, with the search tools moving beyond the browser and onto the desktop and the mobile handset.

The combination of staggering profitability, market concentration, shareholder expectations and technical integration has created a climate for sustainable and exceptional product development. By giving customers the tools and applications they want, the mega-brands of digital are securing unstoppable growth in the supply of search advertising inventory, as well as its migration into new physical, geographic and sectoral markets.

Search isn't just riding high on the ecommerce sector, which itself swelled to £32bn in 2006. It's now, finally, getting a window into brand spend as Google and Yahoo argue that the pay-per-click model is key in the brand activation that translates the awareness of a television campaign into website traffic for the TV advertiser, which means more slices carved out of TV budgets, and cut with precision and accountability.

The web? Just the job
Job advertising continues to be the lead category, among the ad revenues which can be pinned to certain industries. This time around, recruitment accounted for a quarter of all web advertising spend (24.7 per cent), up 5.3 points, and started to suggest that the main period of switch can be mapped out. Although volumes will continue to migrate, some spend will stay in both newspapers and magazines, although advertising form and structure will change towards brand messages about the recruiter (supported by their own recruitment websites as well as the myriad networks of third parties).

Finance sector matures
In contrast, while the finance sector was still up almost 40 per cent, its share slipped down 3.9 points to 11.7 per cent moving it into third place for the first time in many years. Hold back from thinking financial advertisers are losing their enthusiasm for the web. Instead, much of their growing budgets and energies are being transferred into non-advertising strategies that focus on boosting customer acquisition through search engine optimisation (SEO), and boosting conversions through improved customer journey modelling within their own sites. Recent big spenders in finance that we surveyed focused on the limits of online advertising in a saturated market and how they needed to fuel web customer acquisition with supporting tools.

Consumer goods -- still missing a trick
As for consumer goods (CPG), ad spend is making only tiny progress; the audience switch to IPTV will see a step-change in CPG advertising.

Brand motoring budgets -- another tipping point
Motoring firms get it. That's the conclusion you have to draw as automotive rises to become the second largest single category of advertising brand. With a market share of 12.5 per cent, the sector includes classified motoring listings as well as big budget video display spend. Smarter models of integrated marketing have placed the web at the heart of the mix for many motoring clients, and the media industry has responded, with rapid product innovation from motoring magazine brands, online pure-plays, as well as Ebay's and Google's vertical strategies.

Next week: what you should do now -- some key takeouts 

Danny Meadows-Klue is founder and CEO of Digital Strategy Consulting.