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Yahoo!’s Outsourcing to Google

Yahoo! recently announced that they are going to display Google AdWords ads for some of their queries. If you read a lot about internet marketing, you’ll see that the popular angle towards explaining the extra revenue Yahoo! will generate from such a move is AdWords has greater relevance in ad distribution. I don’t think that’s the primary reason why Yahoo! will make more, and if it was, it’s bad news for Yahoo!. I’d count that as a vote of no confidence for their new Panama system, and that fact could be more damaging to their reputation than an extra $250 million in revenue is worth.

It’s true that Google provides more match types, better negative matching, more location targeting, and apparently less spammy search partners. When I manage ads on AdWords and Yahoo! Search Marketing for the same company, I typically expect better conversion rates on Google than on Yahoo!. But I also allow for a higher cost per conversion on AdWords. Getting more traffic, more exposure on first page results, itself has value to the companies I manage. These companies are less concerned with YSM. This pushes more budget into Google AdWords, regardless of the cost to generate direct business. The reasons I think why Yahoo! will generate more revenue by using AdWords’ distribution are:

  1. Google has more advertisers in their AdWords program, making bids more competitive. The reason for this is because Google brings in a greater amount of traffic.
  2. Google monetizes search results better. AdWords typically has higher minimum bids, limiting distribution on their search results pages, narrowing the gap between the actual value of a query and an advertiser’s cost.

It’s hard to imagine Yahoo! making this new deal without the MSN bid for their company. Yahoo! rejected a huge offer that by just about every measure over-valued their company significantly – every measure except those that came from Yahoo!. I don’t know enough about the politics between these two companies to know why Yahoo! would reject so much money for their company, but it probably had to do with a desire not to deal with Microsoft and their company politic. Pissing off your investors requires something of a concession to immediately boost revenue. All the original noise about “semantic web” has just about died down, so a quick cash injection from Google doesn’t hurt.

Why Yahoo! Could Be In Trouble

Yahoo! is somewhat different from Google. Yahoo! is a portal; Google is more of a pure search engine that provides a whole bunch of other services. It wasn’t too long ago when Yahoo!’s search results were powered by Google. Yahoo! makes a lot of revenue from display advertising (also called graphical advertising or brand advertising) from large corporations. Google makes a lot of revenue from text ads. Yahoo! also makes a good chunk from text ads, exactly how much isn’t revealed. Yahoo! groups their display advertising and search advertising under “marketing services” in their quarterly revenue reports. They don’t break it up. But most of that revenue is from display advertising.
When most of your revenue comes from display advertising, you pay attention to visitors and page views. And that’s what Yahoo! has done in the past. They wanted to increase traffic through their properties. Google and everyone else have pretty much focused on search share. The problem for Yahoo! is Google has recently surpassed Yahoo! in visitors in the US, according to comscore. And it is totally blowing away Yahoo! in search share. Not only that, Google has purchased a company that specializes in display advertising, and has huge distribution – Double Click. Google continues to gain ground on Yahoo! and is capable of offering just about any service that Yahoo! can.

It seems like Yahoo!’s solution is to focus on sharing and social media, integrating its existing properties. This seems to be the agreed focus for gaining dominance over mobile devices. The problem is Yahoo! missed the boat on social media sites and is behind. Google has already developed a platform for programming applications for mobile devices, called “android.” If it gets picked up, Google could become the starting point for most mobile devices connecting to the web. So Google seems ready to beat out Yahoo! here as well.

What Might Happen

Right now, you can go on Yahoo!’s home page and browse around. Google is a bit more sophisticated, you have to perform a search or make your own page with iGoogle. Google’s search engine displays results from their own properties – they call it universal search – but it’s still kind of a weak way to promote everything they do. Google isn’t really a portal like Yahoo! is.

Even if Google sticks with their same strategy, I expect they’ll continue to build more of a following, and it’ll probably be at the expense of Yahoo!. This cuts into Yahoo!’s major revenue source.

The future isn’t looking bright for Yahoo!. Their best bet is Google might not be particularly interested in watching Yahoo! tank. They work well with each other, given past deals and relationships. And Google probably doesn’t want to continuously be the target of anti-trust investigations. Their current focus for growth seems to lie in other media – print, radio, television, kiosks – all other places you can fit an ad. This is well beyond the scope of Yahoo! So Yahoo! might just assume the role of Google’s pseudo-competitor on the web. This might guarantee their long-term existence, but I don’t think it will help the company grow.

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About Steve Loszewski

Steve Loszewski leads the paid search team at Pure Visibility. He is individually qualified in AdWords, has the Google Analytics Individual Qualification, is an Oracle Database 10g Administrator Certified Associate, and is a Sun Certified Programmer for the Java Platform SE 6. Steve has been managing AdWords accounts since 2005 and also has experience in SEO. Most of his time is spent in the trenches, working with keywords, ads, bids, landing pages, placements, etc within the AdWords Interface. You can find him on Google+.

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