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Web Advertisers Say End Is Near For Yahoo Search Ad Platform

Last Update: 6/13/2008 4:08:39 PM

By Scott Morrison
of DOW JONES NEWSWIRES

SAN FRANCISCO (Dow Jones)–Yahoo Inc.’s (YHOO) decision to ink an ad pact with
rival Google Inc. (GOOG) likely marks the beginning of the end for Yahoo’s Panama
search advertising platform, advertisers said Friday.

“Panama is dead. It never really worked anyway,” said Kathy Sharpe, chief
executive of digital marketing agency Sharpe Partners.

Less clear is how the deal will impact Yahoo’s long-term goal to roll out an
integrated advertising platform that includes search and display advertising. One
certainty, though, is that advertisers likely will have to pay higher prices as
Google handles more search advertising.

Yahoo on Thursday announced a non-exclusive pact that will enable it to run
Google ads alongside search results on some of Yahoo’s web properties in the U.S.
and Canada. Yahoo said the agreement, unveiled just hours after Yahoo said it had
broken off negotiations with suitor Microsoft Corp. (MSFT), was expected to boost
revenue by as much as $800 million a year and bolster its competitive position in
online advertising.

But many in the advertising community described the deal as a Faustian bargain
that would generate a modest increase in revenue at the long-term cost of
crippling its search advertising business.

Evan Andrews, search analyst at Jupiter Research, said some search advertisers
like the deal because they want to manage all their ads on Google’s superior
platform and still get access to Yahoo’s users.

“Now that you can use Google and be distributed on Yahoo, why wouldn’t you?” he
asked.

Yahoo President Susan Decker disputed that view in a conference call Thursday,
arguing that the agreement gives Yahoo the flexibility to determine which ads
will appear on Yahoo properties, so advertisers will never be able to assume that
any Google ad will appear on Yahoo pages.

Chris Lien, chief executive of Marin Software, which makes applications that
large advertisers and agencies use to manage their search ad budgets, was less
certain that advertisers would move away from Yahoo. He argued that most big
advertisers already use both and would continue to do so to make sure their ads
are shown as widely as possible. But he said the deal as structured would do
little to improve Yahoo’s competitive position.

“This doesn’t bring (Yahoo) leadership in search advertising, and it doesn’t give
them the cost benefits of exiting search advertising,” he said.

More certain is that advertisers will end up paying higher prices for search
keywords against which search ads are shown. Google’s average keyword prices are
higher because its technology provides a better return to advertisers, who are
thus willing to bid more in the company’s keyword auctions.

That also enables Google to make an estimated 60%-70% more revenue for each
search ad it serves, a gap that Yahoo hopes to close by displaying Google ads on
its pages.

“Fewer choices typically drive up prices,” said Matthew Greitzer, vice president
of search marketing at online advertising agency Avenue A/Razorfish.

But observers are less clear on what the deal will mean for Yahoo’s efforts to
build an integrated advertising platform that incorporates search and display
ads. Lien suggested that Google’s efforts to build out DoubleClick display
advertising technologies, combined with an unassailable lead in search ads would
give it a huge advantage over Yahoo.

“The integrated ad platform does not yet exist, but when it does, Google will
probably offer better volume and results,” he said, adding that Yahoo’s eroding
position in search will hamper its efforts to deliver a competitive integrated
platform. “It’s like having a stool without one of the critical legs.”

James Mitchell, analyst at Goldman Sachs, said the agreement should position
Google as the ‘must buy’ for search advertisers, and thus as the company best
placed to sell online search and display advertising together.

But Greitzer said that while the Google pact relegates Yahoo to being a “tertiary
player in the paid advertising space,” he suggested that Yahoo could still build
a significant integrated ad platform as long as it can use its search advertising
intelligence to deliver target brand advertising to users.

“If they have the data and they can act on the data, then they haven’t given up
much on the integrated platform,” he said.

-By Scott Morrison; Dow Jones Newswires; 415-765-6118;
scott.morrison@dowjones.com

(END) Dow Jones Newswires

June 13, 2008 16:08 ET (20:08 GMT)

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