Yahoo to test Google search ads

by Juan Carlos Peréz

April 10, 2008 —

Yahoo will test displaying
Google search ads in a small
number of its search engine queries, a move likely to be interpreted as the
latest in a series of Yahoo maneuvers to resist Microsoft's
acquisition attempt.

The test, expected to last up to two weeks and be limited to up to 3 percent
of Yahoo search queries in the U.S., is specifically for Google's AdSense for
Search service. In other words, Yahoo would be acting as one of the Web publishers
that carry pay-per-click text ads from Google. The ads will appear only in Yahoo.com.

Yahoo noted that "the testing does not necessarily mean that Yahoo will
join the AdSense for Search program or that any further commercial relationship
with Google will result." Yahoo will not comment on the nature or timing
of any potential relationship with Google.

Microsoft, whose acquisition offer was rejected by Yahoo's board in February,
on Saturday said it will launch a proxy fight to attempt a hostile takeover
if Yahoo doesn't agree to the acquisition in the next three weeks.

On Wednesday, Microsoft blasted the Google-Yahoo announcement, saying that
a broad outsourcing deal would inevitably run into regulatory trouble because
it would give Google more than 90 percent of the search advertising market.

"This would make the market far less competitive, in sharp contrast to
our own proposal to acquire Yahoo. We will assess closely all of our options,"
said Brad Smith, Microsoft’s general counsel, in a statement.

"Our proposal remains the only alternative put forward that offers Yahoo
shareholders full and fair value for their shares, gives every shareholder a
vote on the future of the company, and enhances choice for content creators,
advertisers, and consumers," Smith said.

Google has a share of between 70 percent and 75 percent of U.S. search ad spending,
and Yahoo has about 15 percent, said Karsten Weide, an IDC analyst. If Yahoo
fully outsourced its search ads, Google would have a monopoly in this segment
of the market, but such a deal wouldn't give Google a monopoly on overall ad
spending, he said.

With Yahoo's search business, Google's share of the U.S. online ad spending
would have been around 36 percent in 2007's fourth quarter, Weide said. This
could be an argument against antitrust concerns, along with the fact that Yahoo
would likely get most of the money per click, and that while Google rules search
advertising, it is a minor player in other online ad segments, like display
ads such as banners, he said. Still, it's clear that a search ad outsourcing
deal would attract a lot of regulatory attention.

Beyond the regulatory issue, this deal wouldn't be good for Yahoo in its attempts
to compete broadly against Google, he said. Yahoo should have its own search
ad business, Weide said.

"The question is: Is this real? Is Yahoo seriously considering replacing
[its search ad system] with Google's?" Weide said. "Or is Yahoo doing
this merely to annoy Microsoft and drive Microsoft away from its acquisition
attempt? It's not clear."

Eric Goldman, assistant professor at the Santa Clara University School of Law,
points out that the potential outsourcing deal again brings up the often-discussed
issue of how to delineate the relevant online ad market that would be impacted.
Should the regulatory bodies narrow their focus to the online search ad segment,
expand it to the overall online ad market, or open it up widely by considering
the ad market in general, including radio, TV, print and the like?

"I'm torn about this," said Goldman, who is also director of the
university's High Tech Law Institute. While Google leads in search advertising,
there are plenty of opportunities for competitors to come up with a system that
puts Google's dominance at risk by offering ad targeting that gives advertisers
a better return on investment, he said. On the other hand, scale is also key,
and Google has a massive distribution network, which it can use to trump competitors
that offer better ROI results, Goldman said.

The announcement was first reported Wednesday afternoon by The Wall Street
Journal, quoting anonymous sources. A broader agreement to outsource its search
ads to Google could let Yahoo increase its cash flow, because Google ads generate
more revenue per search, the Journal reported, referring to a consensus belief
among financial analysts and Yahoo investors.

Since Feb. 1, when Microsoft made its US$44.6 billion offer, Yahoo's CEO Jerry
Yang and the members of Yahoo's board have been reportedly trying to come up
with an alternative deal. In addition to this Google plan, Yahoo has also held
discussions with AOL, News Corp. and Disney, according to various reports in
the past two months.

Should Yahoo enter into this deal with Google, it would be an acknowledgement
that it has failed to attain its goals in search advertising, despite numerous
efforts, including a significant upgrade of its system called Panama.

It's not clear what would happen to Yahoo's search marketing division, which
runs the company's search advertising, in the event that Yahoo outsourced this
business to Google. For Microsoft, it clearly wouldn't be palatable to have
an agreement of this sort bundled in with its acquisition of Yahoo.

Google reiterated Yahoo's announcement, saying the deal is a limited test and
doesn't necessarily mean that Yahoo will join the AdSense for Search service.

IDG News Service