Web Awash in Ads as Supply Outstrips Demand

The problem for Web publishers is a textbook case from Economics 101: Supply is far outstripping demand.

Lesson 1: U.S. ad impressions hit 1.3 trillion in the third quarter, a 22 percent increase from a year earlier, according to comScore.

The increase is a good news-bad news scenario. People are clearly spending more time online, but publishers are locked in an unsustainable arms race to eke out profitable businesses.

With display ad rates pitifully low compared to offline prices, many publishers have turned to more ads. That’s led to the current glut of impressions and a vicious cycle that will only further commoditize ad inventory.

The problem is particularly acute for publishers that rely on professionally produced content. The explosion of social networking means ever more (and cheaper) ad impressions. Facebook now accounts for an astounding 23 percent of all U.S. online ad impressions. That’s equivalent to 297 billion impressions in the quarter. Its share a year ago was 9.2 percent. Facebook served three times as many ads in this year’s third quarter as last year’s.

Yahoo ranked No. 2 in ad impressions, showing 140 billion in the quarter. Microsoft was third with 64 billion. Fox was fourth (48 billion) and Google fifth (35 billion).

Some publishers are taking steps to correct the problem. AOL hopes its new Project Devil super-sized units will clean up its Web pages and result in premium pricing. The early results aren’t promising: AOL’s ad revenue declined 27 percent in the most recent quarter. CEO Tim Armstrong described the drop as “self-inflicted” in an attempt to restructure the economics of AOL’s business.