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Spending On Paid Search Will Slow, Report Says

Search sites need to figure out how to tap into local advertising to rekindle growth.
The rapid growth in paid Internet search-engine advertising will slow considerably until search sites and portals devise ways to tap local advertisers, a large commercial segment so far largely ignored, according to a report issued Wednesday by eMarketer, a firm that aggregates and analyzes information about the Internet and E-business.

U.S. paid-search ad spending rocketed 123% in 2003 to nearly $2.1 billion, eMarketer reports. Over the next two years, that growth will slow sharply, yet search-engine ad spending should rise by about $500 million a year, reaching nearly $3 billion in 2005. "No market can keep growing at that pace," says eMarketer senior analyst David Hallerman.

Advertisers spent 30% of their online ad budgets on search engines last year, up from 15.4% in 2002, 4.2% in 2001, and 1.3% in 2000. EMarketer projects that the percentage of online ad spending earmarked for paid searches should inch forward to 32.5% this year and 34.5% next year.

With paid searches, the results will either feature advertisers as the first URLs listed or in a special section labeled sponsored results, often found at the top of the Web page.

Some search firms are trying to develop technology that could easily identify where the user lives, so local companies' URLs would top the results list when he or she searches for a product or service, Hallerman says. Several small search-engine companies have joint projects under way with regional phone companies that publish Yellow Page directories to develop such a service, he says. Until the technology improves, he says, local advertisers will likely stick with print Yellow Pages, which have a proven history of attracting customers.

Another technological refinement that could spur increased search-engine ad sales would be improving contextual searches, in which links to advertisers appear when a user accesses an article on a related subject. Hallerman cites an article about National Basketball Association center Alonzo Mourning, who was forced into early retirement because of kidney disease. The sponsored links next to the article related to facilities that treat kidney diseases. But Hallerman maintains that people reading the article were interested in the sport, not the illness. "More work needs to be done," he says.

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