Om Malik raises the specter of an "eyeball bust" on the arrival of new entrants to the online advertising market.  He argues that, with Microsoft entering the market with its adCenter product, and with Yahoo revamping it's advertising vehicle, that there will be a supply glut and keyword prices will plummet, and the online advertising boom will bust:

The problem is that if three companies are chasing the same advertising dollars, the keyword prices would go down, which theoretically means, the publisher cut of the revenues are going to go down. Ergo… problems down the line.

The only problem is that this isn't how the economics of online advertising works.  More companies chasing ad dollars will do nothing to prices, since those companies don't create supply or set prices.

It's like the stock market.  In the stock market, you have companies selling shares and investors buying them.  The brokers just facilitate transactions - they don't create supply, and they don't set prices.

In the online advertising market, you have people looking for things, and advertisers wanting their attention.  Google, Yahoo and Microsoft are brokers bringing the two groups together -- they don't create supply, and they don't set prices.

Prices are set by supply (of people looking for something) and demand (of advertisers selling something). Just because Yahoo, Microsoft, MySpace or some startup decides to "chase the same advertising dollars" doesn't mean that any of them has created a larger supply of people searching for information, watching online video, or writing snarky blog posts.  Just as the entry of a new broker into the stock market doesn't change the prices of securities, the entry of Microsoft or anyone else into the advertising market won't alter the supply-demand curve of that market.

Now if new products are created that make each click more (or less) relevant to the advertiser, then prices will rise (or fall).  And if one broker is more (or less) effective at delivering interested customers to hungry advertisers, then the market share among the players will change -- but the overall pricing should not.

Understanding that Google and their competitors are marketplaces is important to understanding their prospects, and what could be next.

Yes I agree - Om Malik is wrong here. Apart from being an investor I am also a keyword buyer. We have worked out the most favourable price per click that we are willing to pay. If this is $5 then Microsoft entering the market will not have us paying $4 on Google. We will still be paying $5 on Google and will be willing to pay up to the same on Microsoft.

The $5 gives us a good client aqusition cost - and new brokers of ads don't change that.    

Google's AdSense margins rely on the difference the ($5/click) rates it gets from advertisers less what it has to pay (?<0.05c) to its network (web sites). Keyword rates paid to brokers may not change if truly pay for performance. However, Yahoo and MSN could greatly boost the incentives to web sites. Problem for Google is it loses revenue as well as margins. This is one reason it is desperately spending on R&D to create its OWN sites appeal where it does not have to share with others. In a sense it would end up being a portal like Yahoo which has stagnated relatively.