Is the Google-Yahoo Deal Good for Marketers?

I’ve been quoted in the media as saying that the Google-Yahoo advertising agreement is a bad idea for marketers. While that characterization is generally true, it isn’t true for every marketer. Nor is it true for every search query.

As with most evolutions within the paid search landscape, any shift creates winners and losers, and this deal certainly qualifies as a major shift. All indications are that this shift will begin soon. In fact, Google CEO Eric Schmidt told Bloomberg TV, “We are going to move forward,” citing an early October 2008 launch.

Given that folks from Google, Yahoo, and Microsoft — as well as the U.S. Department of Justice and other regulators — have talked to me directly or indirectly, I thought I’d share my thoughts on the deal in one place for you. Understand that there’s no argument that, at least from a monetization standpoint, this is a good deal for Google and Yahoo. While one can argue that it represents a bad long-term strategic decision for Yahoo, I doubt Yahoo’s board of directors and stockholders have the patience to see if Yahoo can deploy its own technology and fill out its advertiser ranks to monetize better. In effect, Yahoo has been forced to explore alternatives like the Google deal.

As a point of background, Google pays a traffic acquisition cost (TAC) percentage to all syndication partners. It’s widely believed this deal calls for a TAC in the 80 to 85 percent range, meaning that if Google bills one dollar to an advertiser for an ad displayed on Yahoo, Yahoo will receive 80 to 85 cents.

Because I’m firmly in the marketer and business owner camp, I pass no judgment on the legality of whatever business arrangement Google and Yahoo might choose to pursue. Their position is clearly that Yahoo has an asset (search impressions and clicks). How Yahoo chooses to sell that asset at auction and at whose auction (or other method) is Yahoo’s business. Generally within free market economies, you can’t argue with the owner of an asset looking to maximize revenue. Yet that’s exactly what happens when the business entity has monopoly power (full or near monopoly), such as that enjoyed by the electric company or other utilities.

The legal and regulatory issues are for the lawyers to determine. My primary concerns are my clients and the online marketing ecosystem’s health. That’s why I’ll explore both the pros and cons of this proposed deal in this column.

In some cases, the deal may create short-term benefits to consumers and the publishers (Google and Yahoo) but none for marketers. Clearly, the parties wouldn’t have entered into this agreement (after a test) if the result wasn’t better monetization and more money for both Google and Yahoo. This money will come from two kinds of advertisers: those with accounts in both engines and those who have only a Google account.

Because Google has more advertisers than Yahoo, particularly in the local advertising market, there will be better visibility and ad coverage for those marketers not currently advertising in Yahoo’s Panama platform. Small marketers often sign up exclusively with Google, perhaps because they think signing up with Yahoo and Microsoft will take too much time or they prefer Google’s more precise geotargeting. The deal, then, will make small marketers happier.

But what of the larger national marketer who will now be forced to bid against advertisers who have been introduced into the Yahoo ecosystem for the first time? Clearly this marketer would prefer to have Yahoo remain independent.

Google states several things the deal is not. Let’s evaluate a few of them:

• Google claims the deal “does not remove a competitor from the playing field.” But will marketers already less likely to open Yahoo accounts than Google accounts become even more unlikely to do so? Will some marketers abandon Panama altogether?
• According to Google, the deal “does not prevent Yahoo! from making similar deals with others.” But Google’s TAC percentage effectively eliminates any incentive for Yahoo to make additional deals. Because of the increased advertiser density the deal will cause, plus more aggressive bidding in Google (due to its far greater scale/importance and potentially its conversion rate), no other current player will be able to offer as high a yield at a similar TAC. Many postulate that Microsoft would have to offer a TAC over 100 percent to match Google’s monetization.
• Google says the deal “does not increase Google’s share of search traffic.” But it would potentially increase the share of clicks monetized through Google, instead of Yahoo, in cases where a higher-yielding ad from Google (including the TAC) preempts an ad served from within Yahoo’s Panama platform.
• Google assures us that the deal “does not let Google set prices for advertisers.” But Google has a tremendous level of control over bid prices. Currently, there are three effective minimums within Google: the minimum price required to participate at all, the minimum price to get served on Google’s first page, and a potential minimum price for your ad to show up above the organic results. All three methods are an effective means of raising bid prices, particularly when combined with Quality Score formulas.

Google goes on to characterize the deal’s impact on ad prices:

• “The ad auction is dynamic and ever-changing, and prices fluctuate on a query-by-query basis. Google does not manually set ad prices.” Of course, while such prices might not be set manually, Google does have tremendous control over bid prices (see the last bullet above).
• “An advertiser only bids what they think an ad is worth to them.” Actually, sophisticated advertisers never telegraph their full reserve prices to the search engine systems, and these marketers are doing tradeoff analyses between different click opportunities.
• “Ultimately, what advertisers care about are conversions — how much does it cost to make a sale.” True, but not all marketers want to pay the maximum allowable cost for a conversion (assuming that they care only about measurable conversions).
• “More relevant ads will lead to better conversion rates for advertisers and a better experience for users.” While this may be true, what about marketers who essentially have a clone of their Google campaign running in Yahoo already (excluding match type differences)? If the effective cost per thousand (eCPM) of a Google ad being served to Yahoo exceeds that of the Panama ad, such marketers will preempt their own ads.

Next week: the biggest problem of the deal.

For another view of the Google-Yahoo deal, check out Anna Maria Virzi’s column, “Hands Off Google-Yahoo.”

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