Yahoo/Google Search: A Temporary Fix Or A Long-Term Problem?

With Yahoo's directors meeting today to discuss alternatives to a Microsoft takeover, many insiders still believe a Microsoft deal, without News Corp., is the most likely eventual outcome. But in the meanwhile, the online company still has a business to run, as evidenced by its plan to run Google search ads alongside 3% of its own paid and natural search results.

It's been dubbed a quick way to boost revenue by some analysts, and part of a larger "scorched earth" anti-acquisition effort by others.

But search insiders who spoke with Online Media Daily agreed that a long-term strategic partnership between Yahoo and Google would have a negative impact on the search industry, and to a lesser extent, online advertising as a whole.

"This is a fast way to make a lot of revenue, so on the surface it looks like a good business deal for Yahoo and its shareholders," said Chris Silver Smith, lead strategist at Netconcepts. "It would also reduce some administrative costs because we could increase distribution while using one platform to manage the majority of a client's ads. But I don't know that it's very good in the long run, because it reduces competition by making Yahoo increasingly dependent on Google."

Smith added that a lengthy search partnership between the two giants could eventually lead to higher CPCs for advertisers--particularly if Yahoo extended the deal to its content network. "It would increase Google's ad distribution power considerably, because they'd have all of these Yahoo properties that they could deliver some percentage of search ads to," Smith said. "And it's kind of nice to have alternatives to Google's distribution."

According to Brian Wiener, CEO of 360i, it's more than nice to have an alternative to Google with search--it's a necessity. "It would give Google a near-total monopoly over the search market, and that's dangerous for the industry," Wiener said. "It's unhealthy for marketers and for the digital economy. There's a big difference between being the clear number one search provider and being the only provider. If they were to do a long-term partnership, Microsoft's share isn't large enough to really provide any sort of significant alternative."

And Wiener also acknowledged a potential pricing impact. "In theory, a deal like this should make no difference in terms of click prices because the search market operates via auction," he said. "However, Google's auction is fairly opaque. It's become increasingly difficult to determine what's driving their auction, and it would be disconcerting to think that they'd be the only option available."

Indeed, the search giant routinely makes algorithmic changes that impact factors like the minimum bid needed to snag a well-placed ad, in addition to ranking ads with a Quality Score that's calculated from a mix of known factors (like landing page quality) and unknown criteria.

Still, some search experts argue that there's no way that Yahoo could be considering the deal a sustainable option. "I can't see a long-term arrangement coming from this," said Frank Lee, vice president of search at The Search Agency. "There's so much going on in the space--from a possible AOL deal, to News Corp.'s renewed involvement--that I'd much rather wait to get more info before any red flags come up."

Lee said that what was clear was Yahoo's intention of exploring as many ways to bulk up shareholders' wallets (and their confidence) as possible. "It seems like Yahoo is trying to get a sense of any upside in search monetization they might be able to get through alternatives to Panama," he said "It's fair that they do, and it's the ideal time to do it before they make any substantial moves."

Dema Zlotin, founder and vice president of strategic services at Covario, agreed. "This is not a meaningful long-term play, because it flies in the face of everything they've been trying to do to build a unified online advertising platform," Zlotin said. "It's a strategic move to get a better offer out of Microsoft."

Zlotin added that the temporary Google partnership is also a way to show shareholders that there's an alternative to outright acquisition. "The management team is saying, 'let's not just tell our shareholders that we can monetize our inventory better, let's show them,'" he said. For example, Yahoo could monetize search traffic at a dollar per user today, but with the Google deal, the Web giant could start earning $1.50 per user. Although the deal only represents a fraction of their search traffic, Zlotin said that Yahoo could use the stats to extrapolate what would happen if they revved up monetization across the entire network.

Zlotin said that Yahoo top brass could then go back to shareholders and say, 'we don't need to take this offer,' or if the monetization capabilities were actually the same, then they could tell Microsoft to raise the bid. "They'd be able to say: 'Look how much better we monetize than the industry thinks we do. You're undervaluing us, and we want more,'" he said.

Zlotin believes that we're seeing high-powered corporate negotiation at its finest. "This move has created lots of interesting drama and it will probably be written about for years to come," he said. "But at the end of the day, I think the deal goes through."

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