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Study: For Search, Innovation Fuels Ad Growth

The search industry needs continued innovation in areas like local search for it to maintain its healthy advertising growth rate, a new research report said.

Nielsen//NetRatings found that demand for search listings is outstripping supply of ad inventory, leading to higher click prices and dangers that marketers will find fewer cost-effective customer acquisition opportunities.

U.S. Internet users generated 1.2 billion search sessions in May across 21 search engines, up 30 percent from a year ago, Nielsen//NetRatings said. Meanwhile, Forrester forecasts search marketing spending will rise 45 percent from 2003 to 2004.

Kenneth Cassar, director of strategic analysis at Nielsen//NetRatings, said the imbalance meant search prices likely would keep rising, as many of his clients have noted over the past year.

“They're finding situations where the ROI isn't what it quite used to be,” he said, though he noted that search remained a cost-effective marketing tactic.

The situation could be exacerbated as the U.S. Internet population expansion slows. Nielsen//NetRatings found new users were the most significant driver of search-session growth. Yet in May, the firm measured the active U.S. Internet population at 152.7 million, up just 15 percent over the past year. Since 77 percent of the U.S. population is now online and nearly half have broadband connections at home, Cassar sees that growth rate slipping.

“I don't question the long-term efficacy of search marketing,” he said. “However, the status quo is going to need to evolve over the next few years.”

Cassar does not think that moves by Google and Yahoo's Overture Services to offer paid listings on content pages and next to e-mail messages will create the same kind of inventory as search engine advertising because they are not user-generated.

Instead, search engines need to drive more searches per user, Cassar said. One way to do this is through innovations like local search services. Google and Yahoo have offerings in this area, letting advertisers target their listings at users in specific geographic areas.

However, consumers have not fully embraced the search engine as the place to look for local services, like pizza shops or garden stores. Cassar thinks search engines will have a tough time luring local businesses away from tried-and-true offline marketing vehicles like directories.

“If they really want to grow locally, they're going to have to invest in feet on the street,” he said.

Google and Yahoo are loath to take this route, preferring to rely on a self-service model. Yahoo's Overture Services unit started a local ad platform last month meant to appeal to local businesses by building a business information page for them in lieu of a Web site.

Without such search engine-driven innovations, Cassar sees a risk of limited inventory driving search advertisers to lose their focus on direct response metrics in a quest to “own” certain key search terms.

“They can't let themselves get wrapped up in bidding situations like they did in the late 1990s,” he said. “They need to let the economics of each search advertising opportunity make sense, and if they don't make sense they need to be willing to step away.”

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