Even as Carl Icahn rallies angry shareholders to try to force Yahoo back to the bargaining table with Microsoft, one of the “strategic alternatives” Yahoo may still be trying to work out in the background is a search advertising deal with Google. There is a 60 to 70 percent gap between what Google collects for search ads and what Yahoo collects, so simply handing over a portion of its search advertising inventory to Google would boost its cash flow and profits considerably—perhaps adding as much as $1 billion or more in cash flow.
But how could such a deal pass muster with antitrust authorities, who are already investigating the test run Google and Yahoo did last month with only 3 percent of Yahoo’s search ads?
It would all depend on how a deal is structured.
One line of thinking is that Yahoo and Google could get away with a deal that only hands over 10 to 20 percent of Yahoo’s search advertising inventory. This would need to be on a non-exclusive basis, meaning that if somebody else could come in and beat Google’s revenue-per-search-query Yahoo would be free to hand them the ad inventory instead. The assumption was that this would be the 10 to 20 percent of keywords that bring in the highest revenues for Yahoo. (We discussed this point in our interview with Citi analyst Mark Mahaney last month, for instance).
But there is another way Yahoo could get a lot more bang for its buck in a deal with Google. Instead of handing over the most valuable search terms, it would be better off handing over the ones with the biggest delta in profitability (the difference between what Google makes on those terms and what Yahoo makes). Yahoo does not have any trouble getting decent ad rates for the most desirable search terms. Call those the head keywords that bring in the most revenues. What it has trouble making money on are the keywords in the long tail and torso of its advertising inventory. And that’s exactly where Google excels at squeezing out relevant matches and clickthroughs.
If Yahoo can identify which basket of search terms represents the biggest profitability gap compared to what Google makes, it can maximize what part of its ad inventory to outsource to Google. These terms will likely turn out to be the ones that are currently the least valuable ones to Yahoo. Picking the 10 to 20 percent of keywords where the delta is the greatest between what Yahoo and Google are able to charge would effectively multiply the impact of the deal. After all, there is no point in handing over high-revenue search terms that Yahoo is already matching Google on in terms of profitability.
If the numbers work out and antitrust can be avoided, such a deal would certainly be a way to appease (or at least answer) Yahoo’s increasingly irate shareholders. But if Yahoo is serious about striking a deal with Google, it should do so before the proxy battle with Icahn comes to a head.
(Photo credit:Jack Versloot).
Problem: Google’s never going to share rev data with Yahoo.
Problem: Long tail only works if you have significant search volume as well as data on your users in long tail terms.
nice info !
I do not ever see such a deal getting past the regulators as a complete handing over of the kingdom, however a minority hand-off that looks benign and is non exclusive may get a thumbs up for a while. Over time, however, I think Big Brother shuts it down. Just as many were all over MSFT for anit-trust issues over the years, they will be all over Google trying to thwart their rise to a virtual monopoly.
It’s just ridiculous to think a group of regulators has anything to say about these prospective deals. The inventory would be handed over on the merit of how well Google does with it, and some appointed bureucrat that never could have imagined these two businesses in the first place just clucks his tongue and can say no to it.
The threat from a business in a monopoly position is among the most overrated there is. Every one of these little dances done to avoid the attention of regulators simply slows down innovation and costs investors money.
Hey, not sure if my computer is being compromised or not, as I had a “Certificate” error.
Is anyone having trouble viewing their Google.com/adsense page?
This is what I’m getting for an error. Can’t be to sure right now. Let me know.
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and this is a long-term viable strategy how?
maybe i’m dense, but i just don’t get it. to me it seems like more grasping acts of desperation by a bunch of suits who don’t want to get canned when microsoft replaces them by someone competent.
Yahoo could make mad cash by creating a licensed version of YUI. I would definitely pay. Right now YUI is only partially done. And they aren’t putting the resources into it they should.
Why not charge a licensing fee, and finish YUI and make money relicensing the platform rather than trying to cash in on search.
They have a great thing with YUI that Google doesn’t have.
Plus if Google made a YUI, it would be called GUI, and nobody would be able to differentiate it or recognize it in the developer community.
Seriously. I would pay Yahoo if they would finish YUI and only let certain people have access to the full version. My entire new monster/dice competitor is based on it.
forget about it! they will never deal!
This post isn’t really correct. Even if 10% of long tail search terms have a higher individual profitably delta with Google than Yahoo, Yahoo needs to hand over the search terms that will *collectively* increase its revenue the most.
Since Y! may be limited to only a small % of keywords, that means high volume, high delta keywords.
…either they do it or else Yahoo! search will just remain a distant second when it comes to competing with Google.
Personally, I think Yahoo! needs to overhaul their search system and work on their own “algorithm”. I mean their search results are a joke sometimes and they always, always lag behind Google when it comes to giving accurate data/listings.
In Yahoo’s world they have a few major problems with their Search Marketing, but the most important problem is the countries they support. Right now Yahoo supports only 50 different countries, but they really only support 20 countries when you get down to it. Google could really help here as they haven’t been as narrow minded as Yahoo and they support the entire world in the search advertising world.
Backfill. I rarely use Yahoo.com anymore to search, but when I do it’s for really strange keywords. And Yahoo never has any ads for those keywords. I go to Google and they have at least 10. So Yahoo should backfill with Google ads whenever they don’t have enough. They may not make a lot per click, but something is better than nothing.
Just my 2 cents.
Yahoo! stealing people’s credit cards details!? WTF!
http://www.suee...case_detail=260
they will never deal!
Thats an interesting dilemma for Yahoo if they had to sacrifice their own profit at the expense of running google ads. If running google ads makes them more profit than running their own ads, then they should do it, even if if meant giving up the better keywords.
I don’t know why people think MS can save Y!’s ad network. Y! simply isn’t good at search and ads, but they own tons of media property, so they should outsource search and ads. MS sucks at search and ads too. FAIL + FAIL != SUCCESS. The cheerleaders praying for this deal to go through are really just cheering for a small group of people to finally cash in some stock, as the company is chopped up and sold off, and eventually disappears. If you’re hoping for a long term success story that can combat Google, Y! + MS ain’t it.
Y! could reinvent themselves, if they stay independent from MS. Once they are inside MS, all bets are off. From an internet brand perspective, MS buying Y!, would be like Chrysler buying Benz. Y! is still much beloved, but Y! MS would turn into something all together different.
@1 and others, Google doesn’t have to share rev data with Yahoo. All Yahoo would have tyo do is cycle through different baskets of keywords to collect their own data.
They already know how much those keywords were making with Panama. When they put them through Google, they’ll know how much Google can make for them and figure out where the greatest delta lies. And, yes, @10, you are right they will have to look at not just the greatest delta, but where they can get the greatest absolute returns as well. That is still likely to be in keywords in the torso and the tail.
Eric – not sure how that will work.. What happens if an advertiser tries to bid for the “outsourced” search terms on Yahoo’s ad network? Will yahoo prevent them from bidding?
If yahoo can somehow compute the terms with greatest delta as you suggest, it would be far easier to just raise the minimum bid price on those terms (in their own network).
Hi,
Yahoo doing such a deal with Google would be retarded, like GM handling some responsibilty of a core division to Ford, but if it does happen 2 things should be attempted to be required by yahoo of google.
1. open and transparent operation with at least some chinese-walls between google’s different divisions -this would actually benefit google in the long-term, but it would also gain trust from partners, including selecting different data-retention/access policies.
2. If yahoo is essentially going to cement Googles position and make it a virtual guaranteed monopoly into perpetuity (network-effect of intelligence and data-retention), then it should get actual equity in one of the cash-generative units (adwords, adsense, etc.).
Alternatively, in my complete naivety, could someone please explain why the hell yahoo can’t provide a solution itself -what is so special beyond volume and granularity – quality algorithm + ad-auction + adsense/page-context + cookie = success!!!
Yours kindly,
Shakir Razak
Ugh Shakir, you mentioned it yourself.. volume.. Without volume, its impossible for yahoo to generate good effective RPMs on long tail keywords..
There are two kind of people who bid on long tail keywords:
1. Regular advertisers who have long tail keywords in their portfolio
2. Pure Long tail advertisers
Those who belong to the latter category just don’t bother to go on yahoo simply because it just doesn’t generate enough clicks for them, so it’s not worth their time and effort to be on yahoo..
The former category tend to use sophisticated tools and end up bidding on both yahoo and google. But because there’s an absence of category 2 in the bidding process, they end up getting the long tail keywords cheaper as well.
For these reasons, I have a hard time seeing yahoo close the so called delta with google even if it outsources to google unless google and yahoo bidding went through the exact same interface. This is why I think yahoo is much better of merging with microsoft because it can play the volume game much better and reduce the so called deltas..
People are missing the point here!
Yahoo’s value is in it’s advertising systems which monetises its eyeballs. If it hands over the running of it’s ad inventory (even small amounts) it is destroying the only value it has.
So for some short term cash flow gains they destroy their own balance sheet by devaluing their IP not to mention the fact that they will lose great engineers.
All this does is increase Googles power and market share and by stealth Google destroys Yahoo’s balance sheet and IP.
If people think consolidating even more market share with Google is a good thing then they need their heads read and they are hypocrites. The web is no longer about content it is about data and it seems Google and Microsoft get it but sadly Yahoo! and the loony anti-Microsoft crowd don’t.
Many may be missing the whole point here. It’s mostly about the ‘long tail’ (as I see it), and the “marry-up” of Yahoo’s RME to other (many?) Global Ads Networks (including Google’s Ads Manager) through a Global OPEN Exchange “inter-connection”. No? Watch this space.
Just wondering, if Yahoo-Google deal will result in more value for shareholders then why is Carl pushing for a deal with Microsoft.
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