Net Ad Rates Respond to Law of Supply and Demand

The laws of supply and demand are beginning to catch up with the pricing of online advertising, according to a study released Monday.

Internet advertising rates in general fell to their lowest levels in December 1998, but Web site ad rates in two categories--technology and e-commerce--increased, software company AdKnowledge said in its annual Online Advertising Report.

AdKnowledge, which is based in Palo Alto, specializes in online ad management software. According to company co-founder David Zinman, the varied results reflect a pricing adjustment based on supply and demand.

In the past, some critics argued that online advertising rates were artificially high.

Online advertising is the primary source of revenue for many Internet businesses, including popular directories such as that run by Yahoo Inc., which do not sell any products to consumers but offer ad space on their Web sites.

Zinman said the overall decline in ad rates reflects a surplus of online space relative to advertiser demand. According to the AdKnowledge report, the number of Web sites seeking advertisers grew by 38% in 1998.

Forrester Research estimates that ad space inventory, on average, is 70% unsold.

At the same time, Zinman added, the increase in ad rates for technology and e-commerce sites suggests that businesses are getting smarter about the value of advertising on sites within certain categories.

“We’re starting to see the supply-demand equation working. It means we actually have a real marketplace,” Zinman said.

Specifically, the survey shows that overall advertising rates fell 6% from $37.21 CPM, or cost per thousand views, in December 1997, to $35.13 CPM at the end of 1998.