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Yahoo!'s Panama: Little Engine That Couldn't

Pia Sarkar

SAN FRANCISCO -- If Yahoo!'s(YHOO Quote) investment in its Panama advertising platform was meant to turn the company around, all it's done so far is keep it from sinking further.

The tech giant had looked to Panama as a game-changer, allowing it to better compete against its formidable search-advertising opponent, Google(GOOG Quote).

But more than a year after Panama's launch, not much has changed -- Google remains far ahead in the search industry in terms of its money-making abilities with advertising. And while Yahoo! has made gains with Panama, it hasn't been able to accelerate its search market share enough to instill any fear in Google.

So now the real question is: Was it worth it?

The best answer may be another question: Was there any other choice? It's difficult to doubt that when Yahoo!'s growth started to stagnate a few years ago, the company's best ploy was to focus on boosting the revenue capabilities of its search operations -- where Yahoo! was still a significant player, with as much as 30% of the search query share just 18 months ago.

But Yahoo!'s search-monetization efforts have likely come too late: Not only was Panama subject to crucial delays, its effectiveness -- when finally implemented -- came during the period of what can only now be seen as Yahoo!'s involuntary abdication as a major player in search.

Last month, comScore reported that Yahoo!'s market share in U.S. search was 20.4% -- stagnant, at best, from 22.8% in October 2007 and down one-third from late 2006. Google garners more than 60% of U.S. search query share.

Microsoft(MSFT Quote), with its own lack of traction in the Web business, continues to see some value in Yahoo!, given the fact that it wanted to acquire Yahoo! outright and is now in talks to work out an alternative deal with the company.

But Yahoo! also agreed in April to outsource some of its online ads to Google in a two-week test, raising questions as to whether this meant Yahoo! had misgivings about its own platform.

Yahoo! remains in discussions with Google to come up with a more substantial arrangement for its ads. But ever since merger talks with Microsoft collapsed on May 3, there hasn't been as much attention paid toward it, at least not publicly.

That may be because Yahoo! had only dangled a potential deal with Google as a way to make Microsoft back off, which it ultimately did. But now even billionaire investor Carl Icahn, who is trying to oust Yahoo!'s board, is entertaining the idea of a partnership with Google in the event that he can't resuscitate a merger with Microsoft.

David Pann, vice president of advertising at Yahoo!, says the company is committed to being a principal in search.

"Yahoo!'s Panama continues to make good gains, improving search relevance, click-through rates, and the advertiser-user experience," he said in a statement. "We have been working hard to enhance our paid search platform, capabilities and performance including making improvements to our targeting and matching capabilities."

Roger Barnette, president of SearchIgnite, a search marketing technology firm, says there is still plenty of value in Panama and the company's efforts to remake its ad platform were not in vain. Yahoo! needed Panama, because it couldn't afford to fall further behind Google.

"They've developed a platform that gives them levers to pull, and before Panama, they didn't have those levers," Barnette says.

He notes that in the beginning of 2006, Google and Yahoo! were almost neck and neck in terms of market share in advertising spending among his clients. But then Google pulled ahead -- at Yahoo!'s expense. Yahoo! lost even more ground when Microsoft stopped outsourcing its ads to the company and developed its own platform called adCenter.

In October 2006, Yahoo! launched the first phase of what it dubbed "Project Panama" -- an effort to create a more relevant search experience for users and provide additional revenue opportunities for Web publishers, not to mention a way for it to catch up with Google.

Last February, Yahoo! introduced a new way to rank search-marketing ads in the U.S. by factoring in the quality of the ads rather than just the amount that people were bidding on keyword. Yahoo! also added a quality index so that advertisers could measure the quality of their ads. And it offered price discounts on cost-per-clicks from partner sites based on an assessment of the quality of traffic from those sites.

This might have been considered revolutionary for Yahoo!, but old news for Google, which through its own AdSense program had been combining quality and keyword bid prices to rank search ads for some time.

"Google's platform gave advertisers more efficient use of their dollars," Barnette says. "Yahoo! was trying to emulate this when they decided to launch Panama."

Yahoo! wouldn't disclose how much it cost the company to develop Panama, but Jefferies analyst Youssef Squali has estimated it to be somewhere around $150 million.

In the last year, the company has been adding enhancements to the platform, such as a new payment option using PayPal, which is owned by eBay(EBAY Quote), and offering a domain-blocking feature.

It appears Panama has worked, but it's too soon to know how well. In the quarter of its launch last year, it didn't generate the ad dollars that many shareholders had been hoping it would.

In the first quarter of this year, Barnette noted that Yahoo! had made greater gains in market share for advertising spending among his clients than any other Internet provider, including Google. Yahoo! grew 57.6% over last year in the same quarter. But results from last year's first quarter were particularly weak because of a delay in the release of Panama.

Barnette says Panama's technology works perfectly fine and any consideration on Yahoo!'s part to team up with Google to outsource its ads doesn't necessarily mean that its own platform is a failure.

"It is not an admission that Panama has not lived up to expectations but they need more scale in search and advertisers," he says. Scale, however, is hard to come by with a diminished search query share.

Microsoft, which lags significantly behind both Google and Yahoo! in search advertising, recognizes this, which is why it had been so keen on acquiring Yahoo!. Together, the two companies would still lack Google's scale but would have a better chance of narrowing the gap.

Yahoo!, however, might want to tackle Google alone. And perhaps time will tell whether or not Panama was the company's best weapon.