Yahoo, Google Strike a Deal on Paid Search

Market Forces May Lead to Surprising Results as 10-Year Partnership Pans Out

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NEW YORK ( -- Yahoo is outsourcing search monetization to Google in a 10-year deal, the companies officially announced tonight. But advertisers see less competition and higher prices.

Of course, Yahoo describes it as a non-exclusive deal that gives it the ability to display paid search results from Google, Yahoo's own Panama search market or other third parties, presumably Microsoft, which is the only other search player with any significant domestic business. The deal also covers contextual text ads.

Variable factors
But the agreement, which covers searches in the U.S. and Canada, doesn't necessarily protect Yahoo from the possibilities that the deal will erode its search business in the long run or make Google an even more dominant player.

When Google search ads are mixed in with Yahoo search ads for a particular search query, Google will almost always win the better placement, according to search marketers, because it has a better ad-matching and monetization engine. And if Google consistently wins, marketers may be less inclined to bother using the Yahoo system, instead choosing to put their optimization efforts toward a single system. In other words, less to learn, less to manage.

Bryan Wiener, CEO of 360i, said marketers may be less inclined to use it if it erodes Yahoo's share of search spend by even a small amount -- say, from 20% to 18% or 15%. He calls Google's system an "effective but not transparent auction" and said that if it becomes essentially a single provider of search, should it ever become less effective as an advertising solution, marketers won't have the option of moving to another search provider.

"The three keys are innovation, competition and scale," said Rob Norman, CEO of Group M Interaction. "Anything that stops any one of them is a problem."

Location counts online, too
Under the deal, Yahoo will be able to determine which search terms and pages will offer paid results from Google and will determine the number and placement of the results from Google or third parties. But it's clear Yahoo will have to allow Google to monetize many of its commercial searches, or those searches that tend to result in paid search revenue, to generate $800 million in upside revenue during the first year, as predicted. Yahoo said it would generate an additional $250 million to $450 million of additional cash flow.

"Clearly it is time to move on," said Jerry Yang, CEO of Yahoo, on a conference call, obviously referencing the ongoing uncertainty about Yahoo's fate thanks to Microsoft's bid for the company. He cited an "increasing convergence between search and display marketplaces" as an important trend for Yahoo. This deal, he added, is "a natural extension of efforts we've already made to pursue an open marketplace."

He said that the deal isn't required to pass regulatory muster but that both Google and Yahoo have agreed to delay implementation for three months while the Department of Justice takes a look at it.

Planning to investigate
The Senate's Antitrust Subcommittee will also take a look. "This collaboration between two technology giants and direct competitors for internet advertising and search services raises important competition concerns," said Sen. Herb Kohl (D-Wis.). "The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."

Google's senior VP of global sales and business development, Omid Kordestani, addressed the deal in a Google blog post and compared it to how Toyota sells its hybrid technology to General Motors and how Canon provides laser-printer engines for HP. He said it wouldn't raise prices for advertisers, because search pricing is auction-based; many advertisers, however, dispute that.

"By Yahoo's own testament, Google's going to win that auction [for the ad placement]," said Mr. Wiener. "An auction scenario doesn't effectively solve the problem of market concentration. An oligopoly is quickly becoming monopoly."

Added Scott Linzer, director of search marketing for AKQA: "Traditionally Yahoo has seen lower CPCs [costs per click] than Google. We'd presuppose that the higher CPCs marketers pay on Google would be translated to Yahoo channels. So we'd have to take a look at money that was allocated for Yahoo and factor in higher CPCs under this." He said marketers would have to get creative and work hard to maintain client efficiency.

Ranking search terms
Yahoo President Sue Decker suggested that Yahoo wouldn't allow Google to monetize the most common commercial search terms but rather use Google, with its greater advertiser demand, to help monetize the less popular search terms for which Yahoo has less advertiser demand.

"They won't know which inventory they'll get in advance, which we think will keep the marketplace alive and vibrant," she said. She also suggested that it is an ongoing relationship and Yahoo could be looking to help Google monetize display ads, a market into which the search giant is trying to break now that its acquisition of DoubleClick is completed.
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