Scott Karp of Publishing 2.0 argues that search advertising is about to crash. His argument:

This is media economics 101. Ad dollars follow audience. If search only represents 5% of online media time, it shouldn’t have 40% of the dollars, no matter how measurable search advertising is.

Comments to his post called the rationale flawed, noting that the 5% of attention that search captures is more valuable; it's when people are actively looking for something new, and hence when advertising is bound to be most effective.

In my opinion, the tracking capabilities afforded by Internet advertising require advertising to be viewed through the lens of ROI. And as such, the Internet advertising that will be most effective will the kind that aims at reducing transaction cost the most. I wrote about the issue of transaction cost with respect to SEO, which I think ties into the point of search advertising being overvalued: search advertising does nothing to address any issue aside from reducing the search cost component of transaction costs. As a result, transactions that have high information costs, bargaining costs, decision costs, and enforcement costs will not benefit much from search advertising, and may find venues that address those respective issues to yield greater ROI. To illustrate the point, consider the Google search results page for the query search engine optimization. Is a prospective SEO buyer really going to make a purchase based on one of those clicks? Not likely, and especially not likely if they know anything about SEO.

Compare that with the firms advertising on SearchEngineWatch Forums. Since SEWF is already providing information on search engine optimization, it's much harder for an advertiser to put an ad on there that is a blatant scam; the community could call it out quickly, and since SEWF obviously has a smaller set of advertisers to work with, they can do a better job of filtering out the most obvious of scams. They could conceivably take it a step further by charging advertisers for services that would reduce transaction cost -- such as escrow, for example, or even enforcement of contracts between buyers and sellers. While it could be argued that this is a different service than advertising, in my opinion Internet advertising is primarily about ROI -- and hence its value is related to ROI in general. Advertising services that factor such issues into play will be able to deliver greater value to advertisers, publishers, and consumers alike -- and will be able to charge a greater fee for doing so.

So yes, I do think Scott Karp is correct in that search advertising is overvalued. Right now search engines are a platform, but they aren't addressing all the key issues that platforms need to address. Whoever can gain more attention than the search engines and address the issue of transaction cost better than they can will win the advertising/ROI market.

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