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Search engines puzzle over how to cope with demand

Search engines like Yahoo and Google have set off bidding wars among a growing number of marketers who want to place their ads next to search results. That seems like a beautiful thing for Yahoo and Google; but in the long term, some analysts say they think it could haunt them.

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Bob Tedeschi
The New York Times

According to a report that was set for release on Monday 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," 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.

In contrast to the print and television practice, search engine advertisers buy spots without knowing how many times their advertisements are expected to 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, 30 percent more than a year earlier.

The rapid increase in high-speed Internet connections should continue to bolster that growth. NetRatings reported last week that 48 percent of American households had broadband connections, making it much more likely that users will rely on the Web for quick searches instead of using the Yellow Pages, dictionaries and encyclopedias.

But 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, Cassar said the most conservative estimates predict that they will show spending increases of 45 percent. The trend, Cassar said, will ultimately result in advertising prices high enough to keep some marketers from spending on some search terms.

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