Demand for search engine advertising outstripping supply, report says

The demand for search advertising is growing more quickly than the supply of search terms. According to a new report by Nielsen/NetRatings Inc., between May 2003 and May 2004, the number of searches generated by U.S. web users grew by 30% to 1.2 billion sessions. That growth pales in comparison to the 184% growth in search advertising spending reported by the Interactive Advertising Bureau.

The growing imbalance of supply and demand is leading to increasing prices for search keywords; unchecked it could eventually diminish the cost effectiveness of paid search as an advertising medium, the report warns. While advertisers must take steps to make their search investment pay, “The long-term fate of the search engine advertising business is in the hands of the search engines,” according to the report.

Paid search already constitutes about 35% of all online advertising spending, according to the IAB. To further increase the supply of search advertising opportunities, the engines will have to invest in creating new ad opportunities via personalization, localization and specialization. Personalization – tailoring search results based on data captured in the past – and localization – tailoring results to people based on a geographic definition – both will require significant investment by the engines, the report concludes. Increasing specialization will require improved search relevancy filters, and that will require search engines to continue investment in relevancy algorithms.

For their part, marketers who use search advertising should take care to avoid getting into bidding wars if they want to keep their search spending effective, according to Nielsen/NetRatings. “They must not allow themselves to fall into the same trap that so many companies did in the late 1990s, paying huge premiums on top of economically justifiable prices in order to prevent competitors from gaining key real estate on the portal sites,” the report states. “It only takes two competitive companies, each unwilling to allow the other to occupy valuable real estate, to bid prices above an economically justifiable level.”