Thursday, July 22, 2004

Was I Right? Yes I Was!

Time for me to indulge in a little gloating: here's a story that vindicates my longstanding belief that providing search functionality would prove to be a gold mine in the long run, the bursting of the tech bubble notwithstanding.

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 Americans 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.
We've come to a pretty pass when the problem facing search engines is how to increase supply of a good with essentially zero marginal cost! I said that search would be the killer app way back when, and as is now clear, I was right. It's just too bad I didn't have deep enough pockets to stick around to share in the good times that are now here. Nonetheless, the inventory supply problem indicates that there are obviously still major opportunities available for the seizing for those who can identify a gap in the market that needs filling, so who knows ...