Yahoo dumped a bucket of cold water on the (irrational?) exuberance over the torrid growth in online advertising, warning investors that their revenue for Q3 would come in at the low end of their forecast due to an unexpected slowdown in auto and financial services ads:

A Yahoo Inc. executive said Tuesday a slowdown in advertising spending will crimp third-quarter sales, sending the company’s shares sharply lower and prompting selling in other large Internet firms.

Speaking to investors in New York at a conference sponsored by Goldman Sachs, Chief Financial Officer Sue Decker said weak sales of online automotive and financial ads during the last three to four weeks will cause the Internet giant’s revenue to “come in at the bottom half” of the $1.11 billion to $1.22 billion range that Sunnyvale, Calif.-based Yahoo.

Chief Executive Officer Terry Semel, at the same conference, said that the two sales categories are still contributing “meaningful” amounts of revenue for Yahoo but that “they’re not growing as quickly as we might have hoped at this point in time.”

It’s not clear from what I’ve read whether this is a slowdown in display ads or search/contextual ads, but I’m guessing with Yahoo it’s likley the former. If it’s the latter — and if it’s a systemic slowdown — I’d expect we’ll hear about it from Google eventually.

The burning question in my mind is whether this IS a systemic slowdown in ad spending in these categories, and if so WHY? And does it portend a broader slowdown?

There were suggestions at the same conference that Yahoo’s recent ad weakness may not be an isolated problem.

Earlier, Barry Diller, chairman of IAC Media, said his company has experienced a slowdown in financial advertising. Shares of IAC stock traded down 1.8% to $27.91.

The ad slowdown comes as a bit of a surprise. That’s because U.S. online advertising spending is expected to reach a record-setting $8 billion this year, up from $7.2 billion last year, according to eMarketer, an Internet marketing specialist.

These forecasts are of course just educated guess subject to a margin of error, although they’re typically directionally correct — until the trend suddenly reverses direction. Yahoo presumably based its forecasts on historical spending growth by its top advertisers, so something is definitely up. It’s too early to tell whether this is just a blip, but I’m anxious for more details.

UPDATE

From Marshall Kirkpatrick at Techcrunch:

One thing that is worth considering is wether ad buyers are really being served well in the current market. They may well be adjusting to lower than expected returns. If click fraud is tackled meaningfully, cost per action advertising becomes more important and other innovations in online advertising make it a more positive experience for ad buyers then things could change. The emergence of Microsoft as a player in the contextual advertising market will change the overall landscape as well.

The success of Yahoo and Google tricked a lot of people into believing that we had reached the pinnacle of innovation in online advertising. Clearly the hype — and some of the spending — got ahead of the innovation. Holding back spending until online advertising goes through the next evolution would indicate that there’s more deliberation and less bandwagon jumping among online advertisers than many have assumed.

From Drew Robertson:

Yahoo is just the canary in the mine. If you look at the stock prices of Ford Motor (I am an unhappy owner), you can see what is happening in auto sector. Chrysler today said goodbye to SUVs. Higher interest rates have killed the refinance business. And how much do you want for that house in Atherton again? Things are tough out there.

Yahoo has other idiosyncratic problems but this is a systematic problem for the advertising/media industry.

Doh! Auto and financial services — yeah, not a coincidence. I wouldn’t be at all suprise to see overall ad spending in both categories in all media take a dive in 2006.