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Archive for July, 2009

Microsoft – Yahoo: Thoughts

Posted by anandrr on July 31, 2009

My first thought on Microsoft-Yahoo was that Yahoo seemed to have gotten the worse end of the deal. They seemed to have ceded search to Microsoft, got little to no revenue upside but certainly boosted their bottom line. Indeed Lex at the FT seems to agree. Negotiating with no leverage is a bitch. But having slept over it, I am beginning to see why Yahoo had to do what they did.

When I think about Yahoo, Microsoft and Google, they seem to have fundamentally different business foci, Microsoft and Google on one side and Yahoo on the other. Google focuses on helping consumers find what they want. In the process if advertisers have to be inconvenienced, so be it. It’s a curious business that doesn’t mind pissing off the people who pay the bills, but Google does it. This is why the Google marketplace and the Google algorithms have to be opaque, transparency would tilt the balance between the advertiser and the consumer and Google can have none of it. Microsoft is like Google in many ways. They are relatively new to advertising-based business models and would be quite happy to take the side of consumers over advertisers, it is individual consumers who helped them build their core business anyway.

Yahoo is in a different place. While they started out as a Google-like company, the downturn of 2001 forced them to think more about their advertisers. Cash was in short supply and so Yahoo changed the way they thought about their business and ensured that they were as advertiser-friendly as they could be. This worked wonders for Yahoo and they emerged from the downturn looking better than the rest of the dot-coms. The Overture search marketplace was a perfect match for them, it rewarded advertisers willing to pay the most and didn’t consider relevance, advertiser quality or any other metric that Google adds to their auction mix. But of course that made Yahoo search a terrible business, search cannot be won unless you have a consumer focus, in this way it is different from other publishing.

When a consumer searches for a car, she would hate it if the results included advertisements for Tylenol. It wouldn’t matter that Tylenol had research that revealed that 80% of all car-buyers needed a Tylenol within a day of commencing their search. But this does not apply to a page on autos.yahoo.com. Yahoo can show any banner/display ads it wants on those pages so long as the ads perform well for the advertiser and the advertiser is willing to pay for the impression. Yahoo does not risk alienating its consumers by showing irrelevant ads alongside its content (so long as the ads are not objectionable in content or overwhelming in number). So long as Yahoo owned and operated a search advertising exchange, they were in constant internal conflict, the search exchange required Yahoo to prefer its consumers over its advertisers, the advertising business side required Yahoo to prefer its advertisers. This could not hold.

The current deal breaks the dichotomy for Yahoo. All of Yahoo can now focus on helping their customers get the best advertising deal on the Internet across search, display and any other platforms that Yahoo is/will be on. By jettisonning the exchange, Yahoo’s sales team is free to treat the search exchange as just another platform on which clicks and impressions may be bought and consumer data may be gathered. They can even help their customers integrate their display purchase with advertiser click-streams driven from, gasp, Google.

It is in this way that what appears to be a financially weak deal for Yahoo could turn out to be a strategically great deal.

Next up: Google is attempting to create an advertiser-focused exchange on Doubleclick. Our new-found theory indicates that this cannot be the roaring success that it could be, Google will be as internally conflicted as Yahoo was. Yahoo will win that battle with Rightmedia on its side.

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Posted in Advertising, Business, Incentives, Internet | Tagged: , , , , , | 1 Comment »