The glorious abundance of the web may be an illusion, at least when it comes to advertising. The consultants at McKinsey & Company have done an interesting study of the supply and demand for online advertising. They conclude that what will constrain the market’s growth in the near term is not any weakness in demand but rather a shortage in supply. Attractive online ad space, it seems, is scarce and getting scarcer.
They look at the three most popular kinds of online advertising: video ads, search ads, and banner ads. The supply-demand imbalance appears to be most severe in video ads, which have become “highly attractive” to advertisers looking to build brand awareness: “According to many of the video suppliers we interviewed, very little unsold advertising capacity remains today. Assuming that marketers don’t increase the number of ads they place in each video stream, the maximum supply of video ads is currently about $600 million a year – far less than future demand, which we expect to reach $1.4 billion to $3.2 billion in 2007.”
The imbalance is almost as great, though, in search ads, as a result of a sharp decrease in the growth rate for searches: “Annual growth in the overall number of searches is slowing, from 30 percent in 2004 to 20 percent in 2005. Without significant changes in consumer click-through rates or in the prices advertisers are willing to pay, we estimate … that the maximum current value of paid-search advertising is about $7 billion [while] advertisers will want to spend $9 billion to $12 billion on paid search in 2007.”
By contrast, there’s plenty of supply available for banner ads. The problem here is that advertisers don’t much like the space that’s available, particularly the space that’s near user-generated content: “The complex task of spreading media spending across thousands of small Web sites, many with different ad formats, means that advertisers tend to return to heavily trafficked sites, where supply is at a premium. Even on the big portals, marketers are leery of having their ads placed near consumer-generated content that might be objectionable.”
The upshot? Expect higher prices and slower growth in online advertising until supply catches up with demand. As ever, good content is king, and the flood of amateur content doesn’t appear to meet advertisers’ definition of “good.” Maybe professionals aren’t so dispensable after all.