The average price per 1,000 online ad "impressions" -- that is, each banner placed on a Web page -- slipped 5.6% to $35.13 in December from $37.21 a year earlier. And the declines are continuing this year, says AdKnowledge, a firm that helps clients buy banner ads, those boxy promotional pitches slapped on top of Web pages.

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"It's a simple example of supply and demand," said Michele Schott, director of marketing communications for AdKnowledge, based in Palo Alto, Calif. "Many more sites are seeking advertising, so there's a lot more to choose from."

Online advertising is exploding. Jupiter Communications, a New York Internet-research firm, expects it to reach $3 billion this year. But the cost to reach each set of eyeballs started out higher than in long-established media such as television, where the cost of reaching viewers with a 30-second commercial during prime time averages about $12 for each 1,000 homes.

IBM (NYSE:IBM), which spent $50 million last year on Internet ads to promote everything from PCs to consulting services, says it is seeing price declines for Internet ads.

'People are more focused about the use of the Internet. They want to do what they came to do and they don't want to click on a banner.' -- Chan Suh

"We believe it is because sites realize the medium is still in its infancy," IBM spokesman John Bukovinsky said. "Rates need to be competitive to continue to fuel the growth of the Internet."

In fact, deep-pocketed advertisers such as IBM can drive tough bargains and gain deep discounts from Web sites, as they do with other mediums.

Procter & Gamble caused a stir earlier this year when some Web publishers felt strong-armed by P&G's suggestion that it ought to be paying a paltry $5 per 1,000 impressions. P&G today sounds more flexible. "We recognize that there isn't one right solution," says spokeswoman Gretchen L. Briscoe. "We are very happy with the schedule and value that we are receiving for our investments."

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Advertisers say they are demanding lower prices partly because it is tough to measure the online ads' effectiveness. Web publishers contend that banner ads promote a company's brand whether consumers act on the ad or not, but advertisers often are more interested in how many viewers clicked on an ad to learn more (the "click through" rate) or who actually bought one of the advertiser's products.

Click through dismal
Chan Suh is chief executive officer of closely held Agency.com in New York, whose clients include British Airways and Sprint. He says one source of pressure on banner-ad prices is that Web surfers are clicking only on ads a dismal 0.5% of the time, compared with 1% a year ago and 2.5% about two years ago.

"We're seeing a lot of clutter," Suh said. "There are a lot more people online, and a lot more [ads] to click on. People are more focused about the use of the Internet. They want to do what they came to do and they don't want to click on a banner."

Even as the average price of banner ads is moving south, some Web sites still command premium prices. Advertisers on the Economist's Web site pay between $65 and $85 per 1,000 impressions. Its ad space has been sold out for more than an year, while 60% to 80% of the space on most Web sites sits unsold. But less-attractive sites are seeing their values drop as advertisers chase the top ones. And newer sites, desperate to show potential investors any revenue, are cutting deals, sometimes even giving away space.

"We've got two classes; the haves and the have-nots," said Rich LeFurgy, chairman of the Internet Advertising Bureau, an industry group. "The haves are able to maintain and increase their value, and the have-nots are taking less than they're worth."

That is true even within a site. Sites can charge more for ads shown on sections with more desirable demographics, or a better target audience. An ad for a laptop computer might find a more receptive audience among people scanning computer-related information than on pages offering gardening tips.

Prices vary widely
Lycos (Nasdaq:LYCS), the portal site based in Waltham, Mass., says it used to be able to sell space across its network for $18 to $20 per 1,000 impressions just six months ago. Now the same space sells for $10 to $15. But if an advertiser wants to buy banner ads on Lycos's business, career or computer sections, the price is $35. An ad on the mortgage-rate page, within the business section, goes for as much as $150. Those prices have remained steady.

Talking about Web-ad prices is like asking how much it costs to buy a car, says Drew Ianni, an online-advertising analyst at Jupiter. "It could be anything from a Kia to a Bentley," he said.