Demand Exceeds Supply in Search Advertising

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"Search-engine advertising is still seen as a good deal, but if this trend continues and prices go up, advertising dollars may go elsewhere," said Charles Buchwalter of Nielson/NetRatings. "The path to vibrant sustainability is aggressive innovation."

With the demand for paid-search advertising on the Internet growing by leaps and bounds and a limited supply of outlets for such messages, search-engine providers such as Google, Yahoo and MSN stand to gain in the short run but suffer over the long term, according to recent research conducted by Nielsen/NetRatings.

As in nearly all markets, the imbalance between supply and demand in search ads is expected to drive prices higher, thereby slowing growth. Consequently, Nielsen/NetRatings analysts suggest that search firms be more creative, providing additional outlets to advertisers.

Spending Soars

"We know that search advertising is the fastest-growing component in the online-advertising world," said Charles Buchwalter, vice president, Analytics, at Nielsen/NetRatings. He cited research showing that spending in this area grew whopping 184 percent from 2002 to 2003, while the number of searches rose by much less in the same period.

The report shows that Americans conducted 1.2 billion search sessions during May 2004, up 30 percent from May 2003. That growth was driven primarily by a 15 percent increase in the online audience. The number of search sessions per person was a positive 11 percent during the period, while growth in search reach was only 2 percent.

Think Local

Such a strategy would include investments in technology to improve search relevancy -- and in particular, localized results to push local purchases -- by Google, Yahoo and their competitors. Specialization that narrows the focus of search results was recommended as well.

"These companies have done well with improving search capabilities, but if they don't continue to come up with new opportunities consumers will get turned off," said Buchwalter.

Search advertisers are also advised to integrate their initiatives with non-search initiatives, such as keyword purchases coordinated with a television campaign, the report states. And they should refrain from paying huge premiums to prevent competitors from gaining key positioning on the portal sites.