Search engines like Yahoo and Google have spawned bidding wars among a growing number of marketers who want to place their ads next to search results. That is a beautiful thing for Yahoo and Google, of course, but in the long term, some analysts think it could haunt them.
According to a report to be released today by the Internet research firm Nielsen//NetRatings, the demand for search advertising is growing far more quickly than the supply of available advertising spots. The report's author, Kenneth Cassar, said the implications could be far reaching.
"In the long term, we'll hit a wall where a lot of the search buys that make sense today won't make sense anymore because prices will have risen so high," Mr. Cassar said. "So for the search engines to grow their revenues, they'll have to increase supply."
In search advertising, "supply" is a somewhat slippery concept. Unlike in print or television, search engine advertisers buy spots without knowing how many times their advertisements may be seen. They buy placement and pay according to the number of times the ad is clicked on. (They can, however, set a cap on the amount of money they are willing to spend). The number of spots available near search results depends on how many users visit a particular search site and how frequently they type a query for, say, "airline tickets."
Roughly 85 percent of Internet users rely on search sites to navigate the Web, industry executives said. And although the growth in Internet users in the United States is slowing - 77 percent of Americans are online - the average Internet user is searching more. According to NetRatings, online users conducted 1.2 billion searches in May, a year-over-year increase of 30 percent.
The rapid increase in high-speed Internet connections should continue to bolster that growth. NetRatings reported last week that 48 percent of American households that are online have broadband connections, making it much more likely that users will rely on the Web for quick searches instead of using yellow pages, dictionaries and encyclopedias.
But Mr. Cassar said that even a 30 percent growth in new searches was not enough to keep pace with the demand for advertisements that appear alongside search results. Over the course of 2002, marketers increased their spending on search advertising by 184 percent, according to the Interactive Advertising Bureau, a trade group.
Although figures for last year are not yet available, Mr. Cassar said the most conservative estimates predict that they will show spending increases of 45 percent. The trend, Mr. Cassar said, will ultimately result in advertising prices high enough to keep some marketers from spending on some search terms.
Even now, the tightening supply of the most sought-after advertising space has caused some companies to bail out of bidding wars for some phrases.
Eduardo Pretell, eLoan's vice president for marketing, said the company determined how well each search advertisement did in bringing in paying customers, then settled on a bidding price. As a result, the company has refused to outbid Centex, another mortgage company, to advertise next to the search results for "mortgage lender." Last week, Centex topped all bidders at $9.31; eLoan was second highest at $6.26. "But as long as that ad is performing well," Mr. Pretell said, "we're perfectly happy to pay what might appear to others as an exorbitant price."
Neither eLoan nor any other advertisers appear ready to abandon search advertising altogether. Many marketers are just beginning to appreciate the fact that they can use search engines to deliver ads to people who are looking for their services, and pay only when the consumer actually engages with them.
Eloan now bids to advertise alongside "well over 100,000" search terms, including "morgage" and other misspellings, Mr. Pretell said.
He added that he would continue to increase spending on search engines, because they "continue to be one of the lowest-cost advertising channels around."
But as competition increases for the other terms in an advertiser's portfolio, Mr. Cassar of NetRatings said search engines could lose the chance to sell to lower bidders if they did not offer companies other ways to advertise.
Seen through that lens, the battle between Yahoo and Google to improve their search services takes on more importance. Both companies have introduced new search services for consumers - services that give advertisers new ways to bid on search terms. Google last year began testing a local search feature in which users can type a search term and their ZIP code or area code and view a list of local dry cleaners, for instance. Yahoo's Overture unit, which provides search ads to MSN, Yahoo and other search sites, unveiled a similar service last month.
Smaller businesses that previously had no choice but to bid against big, national companies for the top advertising spots suddenly have lower-cost options. Last week, for instance, a toy seller in Reading, Pa., could pay 15 cents to Overture to have its ads shown only to people near Reading. When the geographic limitations are removed, the ad costs $2.01.
The location-based search advertising market still has far to go, analysts said, as smaller businesses have remained loyal to yellow pages companies and the sales representatives who serve them. (Customers of Google and Overture, by contrast, serve themselves.)
But Mr. Cassar said search engines could also create more advertising inventory by offering personalized search or specialized search features, like shopping. Froogle, Google's shopping-search engine, gives sellers of DVD players, for instance, the chance to reach customers that they may not get on the search engine's main pages.
Personalized search, meanwhile, is the last and perhaps most mysterious frontier. Search engines have long sought to build technology that relies on knowledge given them by users, or observed from a user's history of searches, to improve search results. In this regard, Yahoo could have an advantage because it has 140 million registered users who have given the company permission to watch their behavior on the site.
According to Tim Cadogan, vice president for search at Yahoo, the company is "thinking about" how to use that knowledge to improve search.
"The key is to make it clear to the user what is happening, and putting the user in control," he said. "It's going to happen. I just can't be too specific about the timing."
If and when that happens, Yahoo advertisers could theoretically bid not just to have their ads appear when someone types "mortgage refinancing" into a search box, but also to have their ad displayed only to people with household incomes of over $100,000 who have recently visited, say, the mortgage section of Yahoo's finance site.
In that case, marketers might pay even more for the ads than they do now. But advertisers are not interested only in finding cheaper ads on the search engines, according to Pam Stein, manager of Internet marketing for United Airlines. Ms. Stein has been testing a service from Google in which the site determines the location of the searcher, and serves geographically specific ads. As an example, Ms. Stein said the service allows United to serve ads with fares from Denver to searchers from that city.
"It won't necessarily bring the cost down, because we're still bidding against so many players," Ms. Stein said. "But it'll give us more options. We know this is a nut we need to crack."
Bob Tedeschi, The New York Times. July 19, 2004.
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