• by Joe Mandese  @mp_joemandese, July 20, 2004

In theory, paid search advertising would seem to be as potentially unlimited as there are online users searching for information on the Web, but a new analysis suggests that not only is paid search in danger of reaching a plateau, but the growth in demand from marketers is already outpacing the growth in supply. While that might seem like a relatively healthy development for what some have seen as a pure commodities advertising marketplace, the report, which was released Monday by Nielsen//NetRatings, suggests it is beginning to accelerate search advertising costs, which could slow what has become one of the fastest growing segments of online marketing.

"The low-hanging search opportunities are nearly picked over," cautioned Ken Cassar, director of strategic analysis at Nielsen//NetRatings and author of the new report. While the recent inflation of paid search ad costs has not yet reach the point of curtailing demand, Cassar said that is likely to occur unless marketers and search providers can develop more relevant and sophisticated approaches.

"The future of search is dependent on advertisers' continued refinement and understanding of their own valuation metrics and of search providers' continued innovation," predicted Cassar, citing such areas as, "localization, personalization and specialization."

While search providers have already begun expanding and diversifying their offerings, aggressively moving into local search in a way that already is threatening the local Yellow Pages industry, it's unclear whether marketers will be able to move fast in terms of refining their "valuation metrics."

A separate study also released Monday by the Association of National Advertisers and Forrester Research found that for all the focus on ROI (return on investment) the ad industry still lacks any consensus on how to define it, much less measure its results.

Meanwhile, the supply of conventional paid search opportunities continues to expand from two principle sources: an expansion of online users; and a rise in the number of searches conducted by the average online user.

In May, U.S. online users conducted 1.2 billion search sessions, a 30 percent increase over May 2003. The primary driver in that increase was a 15 percent increase in the online universe between May 2003 and May 2004. However, the number of search sessions per user also grew 11 percent during the period. The net impact on search reach rose 2 percent.

Nielsen//NetRatings' Cassar, however, cautions that those rates of growth likely are not sustainable. "Because the vast majority of the online population already uses search and because the size of the online population will inevitably being to slow, future growth must come from growth in the frequency of searches per person," he advises.