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Supply shortage could drive up cost of clicks

Search traffic will likely slow in the coming years, limiting inventory to marketers, study shows.

Online advertisers' demand for exposure in the results of Google, Yahoo and other search engines may soon outpace the supply and drive up prices, according to a new study.

Market researcher Nielsen/NetRatings said in a report released Monday that the growth of Web search traffic will likely slow in the coming years, limiting the inventory available to marketers. Couple that with a continued rise in spending on paid search, and the result could be an increase in prices.

"Knowing demand is going to grow, it leads one to worry that we could be looking at an imbalance between supply and demand, which could lead to increases in price that would undermine the core return-on-investment argument of search advertising," said Ken Cassar, strategic analysis director for Nielsen/NetRatings and author of the report.

Search engine marketing has long been thought of by advertisers as a bargain. They bid for search terms, or keywords, related to their business or products, and the highest bidder wins the right to appear next to related results. Advertisers pay a bid price only when consumers click. But as more advertisers have competed for desirable keywords in their industries, the cost for clicks has risen, too.

On average, advertisers are paying 45 cents per click this year, according to financial analysts, up from 40 cents in 2003 and 30 cents in the second quarter of 2002. In certain sectors, such as travel, legal advice and gaming, the cost can reach several dollars per click.

Still, paid search is booming. U.S. sales from advertiser-paid search results are expected to grow 25 percent this year to $3.2 billion, up from $2.5 billion in 2003, according to research firm eMarketer. From 2002 to 2003, the market rose by 175 percent.

Advertisers also continue to devote more of their online dollars to search. For example, in 2001, advertisers spent 4.2 percent of their online budgets on paid search, compared with 35 percent in 2003, according to research firm eMarketer. In 2004, U.S. advertisers will spend 38 percent of their budgets on search, eMarketer forecasts.

But as the online population peaks, search traffic could plateau, Cassar pointed out.

From May 2003 to May 2004, the number of "search sessions," or unique users using a search engine for a period of time, grew by 30 percent to 1.2 billion, according to Cassar. But that rise was influenced largely by a 15 percent growth in the online population, which will level off in coming years, he said. The growth also benefited from a scant 2 percent rise in the number of people using Web search for the first time and an 11 percent rise in Web searches per person.

As a result, the market will likely grow in the future based on the number of searches per person, Cassar said. Search engines such as Google and Yahoo will be able to offset the imbalance by improving the relevancy of search results. They can do so by targeting search results to geographic location or to individual preferences.

"The real supply win comes when a search engine gets people to look to buy things online that they had historically done offline," Cassar said.