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POV: Yahoo Google Search Advertising Partnership

25 September 2008

Here’s a republish of a POV paper I wrote for Chrysler in June regarding the  proposed Yahoo/Google ad partnership.

POV
Yahoo – Google Search Advertising Partnership

Situation
In early June 2008, Yahoo received and rejected an unsolicited buy-out offer by Microsoft of over $47.5B.  In the wake of this collapsed deal. Yahoo CEO Jerry Yang and others have proposed a number of alternate proposals in hopes of reviving an ailing Yahoo.  Most surprising perhaps is the recent proposed advertising partnership between Yahoo and arch rival Google.

Under the terms of this proposed deal, Yahoo would grant Google a non-exclusive license to sell search advertising on Yahoo search results and web properties in the U.S. and Canada.  The value of the deal is estimated at $800M per year and had a maximum term of ten years [(1) four year initial term, followed by (2) three year extensions at Yahoo’s discretion].

Interestingly however, the deal would not be a simple substitution of Google ‘Adwords’ ads for Yahoo’s existing ‘Panama’ ads.  Under the terms of the deal, Yahoo would have the option of serving either a Yahoo ad or substituting a Google ad, depending on which advertisement provided them the highest revenue.  Yahoo president claims that Google ads would be limited mostly to long-tail results where Google has a deeper advertiser base. Industry insiders however, remain skeptical of the eventual scope of these ad substitutions.

Yahoo executives also claim that the deal would beneficial for all parties involved, since Google historically monetizes their search ads more effectively than Yahoo.  A recent JP Morgan analysis seems to support part of these statements, claiming that Google monetizes search queries at a 79% higher rate than Yahoo.  This higher rate would be a function of not just Google’s typically higher Cost-per-Click fees for terms, but also their superior ad matching capabilities for contextual ads and content.

What would be the results of this partnership?
From a user perspective, the proposed partnership would have little obvious effect.  Advertisements on Yahoo search result pages would likely become more relevant and targeted as Google’s superior performance-scoring and relevancy-matching systems drive out some off-topic and branding-focused advertisements.  Most noticeable improvements would likely come from contextual search ads placed on Yahoo web properties.  Contextual advertising systems match web page content with appropriate search ads using sophisticated ranking algorithms similar to those used to score natural search results.  Google’s contextual placement system is superior to Yahoo’s flawed system and users would likely experience greatly improved ad targeting on Yahoo web properties under the proposed partnership.

Would this be good for advertisers?
This is a complex question.  All initial impressions suggest that the partnership will increase search advertising prices and consequently hurt advertisers, however the devil is in the details.  Rationally, if this deal is a win-win for both Yahoo and Google, additional revenue must be entering the market at some point – the most obvious source being the pockets of existing Yahoo advertisers.  Where things do get interesting however, is that paying higher fees for Yahoo search ads may not necessarily be a negative where existing advertisers are concerned.

One of the benefits of ROI modeling for search advertising is that it reveals hidden relationships between upfront costs and bottom-line revenue.  While our seat-of-pants reaction to increased CPC search fees is an expectation of reduced campaign performance, this is not necessarily the case if increases come in conjunction with significantly improved targeting and conversion rate behaviors.

Google has historically commanded a CPC price premium over all other paid search platforms.  This stems  from a demonstrated ability to deliver superior KPIs even with higher prices factored in.  It remains to be seen whether Google can bring these same performance gains to the proposed partnership.  Advanced analysis of paid search performance will become even more crucial to existing advertisers as they evaluate the impact of changing CPCs and performance on their existing campaigns.

Is this good for the marketplace?
This is an increasingly murky aspect of the partnership.  Google currently controls 50-60% of the search marketplace.  However, when we look specifically at the market for paid search advertisments, they are much closer to 70-80% of the market.  Many in the industry claim this represents an effective monopoly of search advertising – a situation the Yahoo-Google partnership will only exacerbate.

Microsoft has already issued statements to consumer protection groups claiming that the deal would “limit choice for advertisers” and “destroy a competitive environment”.  Microsoft stated that the Yahoo-Google deal would place 90% of the search ad market under Google’s direct control.

Also concerning is the fact that the deal appears to have been developed in conjuction with direct DOJ oversight, leading some in the legal community to suspect that it may have been structured specifically to avoid regulation.  David Turetsky of Dewey and LeBoeuf, LLP stated “They’ve had a dialogue with the DOJ…which is unusual.  DOJ is not in the business of giving counseling to companies as to what flies.”

Additional concerns center on the impact of the deal on industry-wide search ad pricing.  The structure of the ad delivery system may act to fix minimum prices across the search ad marketplace, since Yahoo would never sell an ad for less than what Google would pay them.

At the heart of any antitrust investigation would be the definition of what is Google’s core business.  Currently Google derives most of its revenue from search advertisements.  However, they are also actively working to expand into television, radio, and outdoor advertising, with only limited success.  Central will be regulator’s determination of what defines Google’s core marketplace.  Is it limited mostly to search advertising, or is their market online advertising or even the entire advertising industry. Google will try to portray their market as broadly as possible – however their revenue breakdowns will likely suggest otherwise.

How is this likely to affect Chrysler Search?
Google SVP and Adwords originator Omid Kordestani has stated that the deal “will not allow Google to raise prices”; this however is a matter of considered semantics.  In Adwords, Google has built a brilliant system to harness market forces for delivering maximum profits while avoiding appearance of undue manipulation.  With Adwords Google never has to “raise prices”, they simply adjust the rules of the system to encourage market forces to raise prices for them.

It appears likely that any Yahoo-Google deal will result in increased search advertising fees for Chrysler ads showing on Yahoo.  Whether these fees are accompanied by performance improvements sufficient to offset additional costs remains to be seen.

We recommend continuing to watch specifics of this deal for new insights into pricing and performance.


One Response to ' POV: Yahoo Google Search Advertising Partnership '

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  1. Damon Henry said,

    on September 28th, 2008 at 5:24 am

    Good writeup. I agree with the points above. As search engines continue to consolidate and prices continue to increase, I believe a greater emphasis will be placed on SEO and building longer-term relationships with consumers as opposed to renting traffic via paid search. I’ve seen figures that show natural search getting only 1/10 the budget of it’s paid counterpart.

    I’ll also be watching the impact of this deal closely to see how it affects the bottom line. Only time will tell.

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