SAN FRANCISCO -- As criticism continues to mount over a search advertising tie-in between Yahoo! ( YHOO) and Google ( GOOG), the two companies are ratcheting up their defenses to ensure that the deal goes through. In a recent post on Yahoo!'s corporate blog titled, "Myth-busting and the Yahoo!-Google agreement," President Sue Decker offered a lengthy explanation of how the company's decision to outsource some of its online ads in the U.S. and Canada to Google wouldn't hurt advertisers, as some have feared. Google has gone even further, creating an entire site that addresses the criticisms point by point, and quotes various advertisers and marketers supporting the deal. It plans to move ahead with the search arrangement on Oct. 11. Nonetheless, many in the industry still need more convincing. Several groups have already voiced their opposition to the deal, including the Association of National Advertisers, the World Association of Newspapers, the World Federation of Advertisers and the International Advertising Association. Their main concerns are over Google's current dominance in the search business, which could be further cemented from a partnership with Yahoo!. Advertisers also worry that ad prices will shoot up in the absence of competition. The U.S. Department of Justice and the European Commission are closely scrutinizing the arrangement, although it isn't clear if either of them will challenge it. Several state attorneys general also are looking into it. Yahoo! and Google use a similar model but different algorithms for determining prices for search ads on their sites. Advertisers bid on keywords through a competitive auction. Ads are then ranked on the search page based on the highest bids as well as quality scores.
SearchIgnite, a search marketing technology firm, conducted an analysis of Yahoo!'s cost per click for running the same keyword for the same advertiser in the same position on the page as Google. It found that advertising on Google cost more than advertising on Yahoo!. More important, SearchIgnite maintained that the differential could sway keyword prices on Yahoo! , pushing them up by 22% once the agreement is carried out, assuming that Yahoo! pursues a profit maximization strategy. Google disputed SearchIgnite's findings, arguing the firm made some flawed assumptions. "First, the report fails to acknowledge that ad prices are not set by Yahoo! or Google, but by advertisers themselves, through the auction process," the company said on its site. "The report also mistakenly claims that for any given keyword, Yahoo! will have the ability to see whose ads are priced higher - Yahoo!'s or Google's - and then decide which ads to serve. "Finally, the report mistakenly assumes that Yahoo! will serve Google ads for as many of its search queries as possible, contradicting Yahoo!'s own statements to the contrary." On Yahoo!'s blog, Decker argued that the monetization gap between Google and Yahoo! "is in reality a value gap. Where Google is getting higher bids than Yahoo! today, this is because advertisers perceive that Google is delivering more value -- more targeted leads, more clicks and more conversions." She further asserted that by using Google ads in some instances, Yahoo! can backfill search-result pages where the company hasn't generated ads on its own.
For Yahoo!, the stakes in this deal are particularly high in light of recent events. The company ticked off a lot of investors after a proposed merger with Microsoft ( MSFT) collapsed this summer, resulting in a steep falloff in Yahoo!'s stock price that has yet to recover. The deal with Google was meant to placate some of that anger. Yahoo! estimated the outsourced ads could generate $800 million in annual revenue and $250 million to $450 million in cash flow. Yahoo! on its own has long struggled to compete with Google, with only 19.6% of the search market share compared with its rival's 63%, according to comScore. Even with a recent overhaul of its advertising platform, Yahoo!'s revenue growth has been considerably slower than Google's. And with advertising spending on the decline in a tough economic environment, it's hard to imagine Yahoo! closing the gap anytime soon. Ned May, a lead analyst for Outsell, a market research firm, sees benefits for Yahoo! in partnering with Google. He points out that the revenue shared with Google through the outsourced ads will allow Yahoo! to inject money back into the company and improve its own technology. And he disagrees that the search deal will hurt advertisers in the long term by damaging competition. "Who would this really hurt? It's going to hurt Yahoo! if it doesn't go through and then the long-term implications are going to matter," May says. But Bob Liodice, president of the Association of National Advertisers, says Yahoo! should be using the cash flow it has available right now to improve its technology and better compete with Google.
He also argues that neither Yahoo! nor Google has made it clear who among advertisers will benefit from the deal. Will it be better for 5% of the industry or 95% of the industry? No one knows. "The reality is that it might not lead to any improvement," Liodice says. "When I spoke to Yahoo!, they said the deal needs to be understood on conceptual grounds. Google and Yahoo! have not been descriptive enough to see who will be positively affected." He also questions what bets Google is making by entering this deal. "Yahoo! says it will invest and compete and wean off the ads," Liodice says. "If Google knows this, why would they cede to a competitor that will be used against itself longer term?"