It's True: Yahoo Will Test Outsourcing Search Ads to Google

Posted by: Rob Hof on April 09, 2008

By the time you read this, Yahoo will have announced that it is launching a test to run Google ads alongside a limited number of Yahoo search results. I’ve confirmed with two people close to the matter that the deal for now is only a test for a short period of time on a small percentage of Yahoo’s search results. (Text of the release after the jump, along with Microsoft’s response, but Yahoo’s saying it involves 3% of search queries in the U.S., for two weeks.)

Analysts have long pointed out that Yahoo could jack up its profits overnight by outsourcing its search advertising to Google, which generates much more revenue per search than Yahoo. Indeed, such a deal has been rumored for at least the past year.

But the timing of this test, news of which the Wall Street Journal broke a few minutes before the announcement, is not coincidental. Sources said the test is part of the alternatives Yahoo has been exploring to counter Microsoft’s unsolicited bid for the company, which has ratcheted up in intensity the last few days. The test is clearly intended to show that Yahoo has not been sitting on its duff, as Microsoft’s letter to Yahoo’s board this weekend implied. So for several reasons, this announcement sounds like a prod at Microsoft to up its $31-a-share deal, which is now worth a couple of dollars less than that thanks to a drop in Microsoft’s stock since the Jan. 31 bid.

For one, the people who know about the announcement also emphasize that it’s only a small, short test, intended to find out how much more revenue Google ads could generate than Yahoo’s own. Also, Google already understands the regulatory problems it would run into with a larger Yahoo deal, which led it last year to cool on the idea. So a real deal seems rather unlikely.

Indeed, the sources suggest the test shouldn’t interfere with the possibility of reaching a deal with Microsoft, a deal that both analysts and most investors assume will happen before too long. Of course, any kind of significant deal with Google clearly would interfere with a Microsoft deal. So I read into this less an intention on the part of Yahoo to do a deal it has repeatedly shied away from, despite many chances to do it, than a bargaining chip to extract a better price from Microsoft.

Microsoft, in its response, in full after the jump, sounds unimpressed. Though it apparently was impressed enough to let Wisconsin Sen. Herb Kohl, chairman of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, know about it fast enough to issue this statement less than two hours after the announcement: “We will be following closely the results of the short-term test alliance between Yahoo! and Google. Should there be moves to make this agreement permanent, we will examine it closely in the Antitrust Subcommittee to ensure that it does not harm competition. Following closely on the heels of Google’s acquisition of DoubleClick, this Google-Yahoo alliance would represent even further consolidation in the internet advertising market.”

But if this test—potentially within the three-week window Microsoft set up to launch a proxy fight—pans out and Yahoo also manages to come through with a first-quarter report on Apr. 22 that looks stronger than the current low expectations of analysts, suddenly Yahoo will have some leverage it didn’t have before. If the quarter tanks, though, advantage goes back to Microsoft.

Either way, a Microsoft-Yahoo deal probably still gets done. The main uncertainty remains, as it has from the start, not if the deal will get done, but for how much.

Here's the Yahoo press release:

Yahoo! to Conduct Limited U.S. Test of Google's AdSense for Search Service

SUNNYVALE, Calif., Apr 09, 2008 (BUSINESS WIRE) -- Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, announced today that it will begin a limited test of Google Inc.'s AdSense for Search service, which will deliver relevant Google ads alongside Yahoo!'s own search results. The test will apply only to traffic from yahoo.com in the U.S. and will not include Yahoo!'s extended network of affiliate or premium publisher partners. The test is expected to last up to two weeks and will be limited to no more than 3% of Yahoo! search queries.

As previously announced, Yahoo!'s board of directors is exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements. The Company 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. The Company further stated that it would not comment on the nature or timing of any potential relationship.

And here's Microsoft's response, from general counsel Brad Smith:

Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google’s hands. 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. 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.

In other words: You're not fooling us, Yahoo. The deal stands, until you come to the table on our terms.

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Reader Comments

Prashant Trivedi

April 9, 2008 05:51 PM

Microsoft is fooling itself by going in this deal. I think that Microsoft is making biggest mistake since its' inception by acquiring Yahoo.

I still do not understand the strategy part of Microsoft. I can see that by acquiring Yahoo, they get more than 300 million Yahoo users, search technology and a lot of internet real space. But, that is what Yahoo has got today. What will happen after a software company (Microsoft) starts running internet business? Will it be called YAHOO-Soft or MicroYahoo ? What will happen to the brand?

http://bitsandpennies.wordpress.com/

wj oconnell

April 9, 2008 07:11 PM

i dont think anything will happen to the brand name, itll probably read "Yahoo, now enhanced with M-soft technology" or the likes.
Biggest problem right now, is how does Yahoo get its teat out of the wringer.A deal like this, no matter how temporary, or short in duration, means Yahoo and Google have been sharing and swapping technology long enough for this to work,, you dont just walk in like a shoe sales man and say here,,, try this on. They have spent some serious capital, and time to make a "simple " test like this happen. You might say Google and Yahoo were in bed together for awhile, while not bringing it forward because of the anti-trust issues, and shame on em both.
M-soft will most likely aquire Yahoo, but not after some bloodletting on this whole Temporary deal.Yahoo would have been better served cancelling the test and reporting it as a wait and see, an olive branch so to speak, and now the gloves are off, cant wait to see the legal reprise from this one. Wish i were a lawyer right now!!!!!!

Mr. Deleted

April 9, 2008 07:41 PM

Hey, it is funny, cause Yahoo gave the amount of the traffic that they will have google ads on, so it will be easy for G to get out a calculator and multiply.

Also is funny that both yahoo and google would not allow both their ads to be shown at the same time on web pages, but now Yahoo is doing exactly that, google ads on yahoo! If there would be a google-yahoo deal, I wonder how that will effect domain parking companies revnues.

joe
mrdeleted.com

Nodir Ruzmatov

April 9, 2008 07:53 PM

Yahoo - itself cant never compete or even come closer to Google! Thats the fact!
Now Microsoft - cant do nothing too! Even though they have too much cash on hand and they can invest in anything they want! They are not able to compete or take some market share! Because Google market share is too big and their position is too strong!
There is only one way for Microsoft to compete against Google: buy Yahoo!!!

On the other hand Yahoo knows that they are the only solution for Microsoft, thats why they want MORE and MORE money! Plus, Yahoo knows that Microsoft has enough cash to buy them!

Nodir Ruzmatov

Sumeet

April 10, 2008 01:04 AM

Yeah! I agree to both of you.

Anotherinvestor

April 10, 2008 01:09 AM

This deal was in the works for a while. First time it was discussed internally - around last summer. It was part of Rightmedia Exchange discussions - "should we let Google play at the Exchange".

It was very clear to everybody that the answer is "yes" - they just didn't know how to spin it to save their face.

So now, I guess they didn't have a choice. Yahoo spent billions of $$ on search monetization, 1000s of employees are working in that division - and the best it can do - is to plug-in Google. How stupid the tech guys like Qi Lu and David Ku should feel now.

Another interesting point - is that Tim Cadogan who ran that division, just left.

Talk about wasted shareholders money.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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