Five years after the dot-com bubble burst, Internet advertising is finally delivering on its promise.

A passel of industry and analyst reports tell of a very strong 2004 and an even better 2005 for online ad spending. It’s still a tiny portion of the entire advertising-dollar pie, estimated to be $12.3 billion of $256 billion in total spending by one account, but the talk is it’s only going north.

“It engages people, and production values on the Internet have gone through the roof,” said Daniel Stein, co-founder and managing director of EVB, an interactive ad agency in San Francisco whose major clients are Wrigley, LeapFrog and Old Spice. “It’s the growth sector — again.”

Stein says that with a clear view of the rubble of the dot-com bust in the rearview mirror. More than 60,000 jobs were lost in San Francisco alone after the collapse of an illusory Web-based industry, beginning around the fourth quarter of 2000. Many thousands of jobs in online marketing went down with dot-com businesses in the technology-heavy Bay Area. For many companies, online advertising just didn’t work. The world wasn’t ready to spend a sizable portion of its advertising budget online, but that may be changing.

The Internet didn’t go away, and it has become a transforming and integral tool, particularly for marketers who want to bond with customers.

The Interactive Advertising Bureau, a trade association with more than 200 members, and PricewaterhouseCoopers said that Internet advertising totaled about $2.7 billion in the fourth quarter of 2004, the highest revenue quarter the bureau has tracked. The estimate for entire year of 2004 is just over $12 billion — nearly double the $7.2 billion spent in 2003. The fourth-quarter figure is a 24 percent increase, the bureau said.

“You are starting to see marketers stand up and say, ‘You’re right, my customer has shifted his or her behavior to online, and I better be there,’ ” said Greg Stuart, president and chief executive officer of the Interactive Advertising Bureau in New York.

“The experts tell us that, of the time people spend with media, including television, 14 percent of it goes to online,” Stuart said. “That is a dramatic shift, going from zero to 14 percent in 10 years. If time is our most precious commodity, and that is where consumers are spending their time, marketers will follow,” he said.

The phenomenon is certainly paying off for search engines. Google reported revenue last year of $3.19 billion, up from $1.47 billion in 2003. The results reflect an increase in Web site advertisements. Web portal Yahoo had revenue of $3.57 billion for the fiscal year that ended Dec. 31, up from $1.63 billion a year earlier. In the first half of 2004, ad spending in the search category was up 100 percent, according to the bureau, because of the popularity of sponsored ads that are listed next to search results on sites like Google. Spending was up 25 percent for the banner or display category and up nearly 30 percent for classified.

Online advertising’s strong suit is a better sense of accountability, the watchword of the day for marketers, who say they can learn in real time whether a message or interactive elements are effective. Basically, advertisers can see whether someone clicked on an ad and bought something. “You spend a dollar, and you know what you get for it,” said Stuart.

Overall, marketers are increasing their spending as the economy improves. In a survey released Monday, CMO magazine, a marketing trade publication, found that 74 percent of marketing executives anticipate spending more this year. Fifty percent will spend more on advertising and 47 percent will increase interactive marketing, the survey of 543 marketing executives found.

Not surprisingly, there’s a flurry of hiring of Internet-savvy people at advertising agencies. Jonathan Nelson, the 37-year-old chairman of Organic Inc. in San Francisco, a Web site development and Internet advertising agency founded in 1993, needs to hire more than 40 people, adding to the company’s workforce of 300-plus. Organic, a unit of Omnicom, needs creative directors, business development managers, production artists and more at offices in San Francisco, Los Angeles, New York, Detroit and Toronto. Nelson would not comment on a published estimate the company had $52 million in revenue in 2004, a 21 percent increase over 2003, putting it in 16th place among the top 50 interactive agencies.

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