Is the Google-Yahoo Deal Really a Bad Thing?

Posted by: Rob Hof on September 08, 2008

That’s what advertisers think, according to the trade group Association of National Advertisers. The ANA on Sunday filed a letter to the Justice Dept., recommending against the deal under which Yahoo will run Google ads on some of its Web pages in hopes of generating more revenue than it could with its own ads. The ANA is worried that the deal will “diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising.”

When the deal was announced, I heard the same worries from advertisers, agencies, and search marketing firms. Indeed, that concern is why the two companies voluntarily held off for a few months to let the government review the deal, even though they believe the nonexclusive commercial agreement is not legally subject to review.

But when I dug into why prices would rise, in particular, the answers didn’t quite satisfy me. Search ad prices are arrived at through an auction process, not through set prices—meaning that even if Google scoops up even more than the 75% or so of search advertising it already owns, it won’t necessarily be able to wield pricing power like classic monopolists.

Still, the concern I hear from search marketers is that prices will rise because more keywords will be competitive, since Google’s superior algorithms mean that more keywords or keyword combinations bought on Yahoo will produce clicks by potential customers, and those clicks are what advertisers pay for.

But is this competition really a bad thing, especially for consumers? Presumably, consumers are getting more relevant ads, so it’s hard to see harm there. And if they click on them, advertisers are getting more of what they want—potential customers.

It just seems like the prices will rise only if the ads are more effective; if people don’t click on them, nobody pays anything, right? I don’t like to see concentration of power any more than anyone else, and Yahoo’s deal with Google feels like something Yahoo would prefer not to do but felt pressured by shareholders to do as a way extract more value from the company after the failed Microsoft deal.

But do advertisers really have a logical case for saying Yahoo shouldn’t be allowed to do a deal to make more money on its search operation? Especially when it had a deal with Google several years ago? And spent years developing a system that apparently still doesn’t match Google in ad relevance?

I readily admit I may be missing some details here, since search ads remain more than a little murky to me. So please educate me if I’m missing something here.

Update: Nice straight-ahead summary here on MediaPost’s Daily Online Examiner. Also, a Silicon Valley guy who calls himself searchquant notes that the ANA’s Digital Marketing committee is made up of large traditional advertisers, plus three Microsoft people. Interesting post. So is this one from Terry Heaton, whose “heart bleeds for the poor, poor advertising industry.”

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Andrew Goodman

September 8, 2008 09:41 AM

You don't think Google wields pricing power? Competitors alone are not the only force that can push prices up. Google's Quality-Based Bidding formula can, conceivably, cause advertisers to pay a premium on anything from slow-loading landing pages, loosely targeted keywords, ads that are crafted to weed out unqualified prospects, and 'certain classes of keywords' that are just plain troublesome. If this system conceivably *can* set high prices for what Google terms "low quality" keywords, I wouldn't rule it out doing just that... especially as competition diminishes further.

Rob Hof

September 8, 2008 09:59 AM

Andrew, thanks for the insight. You're right, those factors could raise ad prices. On the other hand, several of those factors you mention do in fact make those ads less useful to consumers, and Google has made no secret that one of its goals is to make ads more relevant. Charging more for irrelevant ads, or ones that appear on poorly designed pages that load slowly are arguably less useful to consumers. It's certainly a value judgment, and one open to debate. But it's hard to feel sorry for advertisers who must pay more if they want to run sucky ads, no?

Karim

September 8, 2008 12:24 PM

I think it is good for customers by getting more relevant, and better quality ads, also there is a benefit for advertisers by getting more traffic - more potential conversions. I hope, the prices will not rise, they must be affordable and reasonable.




Karim Sharipov

www.BizFive.com

Business Directory and Resource

Doug Scott

September 8, 2008 12:27 PM

Google has absolute power in the pricing of its pay-per-click ads. While the pricing is done on an auction model, there is nothing to keep Google from setting the price at an artificially high level. The only thing that controls their pricing in a monopolistic environment is the advertisers willingness to pay. In a truly competitive environment, there is an additional price restraint...the competitions' ad pricing. If Google has a monopoly, the price will ultimately be equal to the MOST that advertisers will pay. There are a number of industries in which advertisers would pay more if they have too, due to the effectiveness of search marketing.

Kiernan McGuire

September 8, 2008 03:00 PM

Publishers who run a search network can also suffer from a true monopoly. Advertisers are paying X per click through Google's network; publishers running Adsense get Y per click. Is there any transparency around what cut Google is taking (X-Y)? Such that publishers don't have access to competing ad platforms to run, Google can in effect grow its margins at publisher's expense.

Toney

September 8, 2008 04:56 PM

I know people are scared by the size of Google. And that's understandable. I mean, look at Bill Gates and Microsoft. The bigger he is, the bigger he wants to be. Of course, who doesn't want to be bigger? Personally I've never seen Google to be the monster that other huge companies such as Microsoft have turned out to be.

It's already set up so that the more effective the advertising the more expensive it is, but that's to be expected as well. If we can reach more customers though, what's wrong with that?

Umbalibali

September 8, 2008 06:41 PM

Um... does anyone ever click on ads? Seems like usually the ads that appear aren't even relevant, just triggered by some obscure keyword on the page.

Antoine

September 9, 2008 12:25 AM

By allowing this deal, there will be no more competition. Competition is good in an open market. Without it, you have monopolies which is never good.

Antoine
www.FreshOfftheWeb.com
the latest buzz on the internet

Eric Ambrose

September 9, 2008 02:54 AM

Our company has advertised our nine online retail sites on Google, Yahoo and MSN for eight years. Of the three, Google Adwords is the only one that is based upon competitive bidding with a minimum bid established by a reasonable quality index. Yahoo Search Marketing will artificially inflate minimum bids according to the amount of competition. The Yahoo minimum bid requirements are unreasonable and designed to inflate their revenues unfairly. Traffic on MSN's search engine is so light that you hardly notice. Because Google's system is so far superior to Yahoo's, as a large pay per click advertiser, we would welcome them taking over all three major search engines. Their quality index format for bidding will insure that the results for Google users will be relevant.

Bill Gates

September 9, 2008 03:06 AM

I really can't understand why people say prices will rise. The whole concept in their ads are that their placement is auction based. The advertisers control the price they pay. The more companies want their ads shown the more they pay.

Paul

September 9, 2008 03:15 AM

Interesting to note though, is, Yahoo does price its model higher! Per-click is often at a premium because of their algorithm. How many of the commenters actually use these systems. Hopefully it offers greater revenue to yahoo while reducing the over cost per click as the volume rises.

Thomas

September 9, 2008 03:18 AM

Did Google pay you to write this article? Of course the Yahoo/Google deal is bad...

For the sake of simplicity, let's consider the following example:
For the keyword "shampoo", Google attracts 1 Million hits per day and can convert 20% of the visits into "clicks" - so that's 200K clicks.
While Yahoo generates 500K hits per day and can only convert 10% - so that's 50K clicks.
Now an advertiser is only wants to pay 10 cents per click for the keyword "shampoo". So for Google, he is only willing to pay $20K per day. If another advertiser outbids him, say paying 11 cents, then he drops Google, and just bid on Yahoo, where he manage to get 10 cents per click b/c this is Yahoo's ad inventory with less bidding.. so he pays $5K per day -> sure, he gets less exposure, but hack, at least he gets some exposure.
Now with the Yahoo/Google deal, this option is gone. Everyone is force to bid the same keyword on Google. The advertiser will have no choice but to pay 12 cents per click if he wants any exposure. To get the same 50K clicks, he now needs to pay $60K. $10K more.

Alex

September 9, 2008 03:21 AM

OPEC sets the price for oil by auction. People who write articles about the 'free market' in online advertising because the price is set by 'auction' should:
1) learn about floor prices
2) advertise on line for a year to see how floor prices operate, BEFORE they write articles

Devil Talk

September 9, 2008 05:56 AM

oh well, is there a need to merge or buy over? no matter what u still always been no.2 ... waste of money since u cant get to 1. why not try google or ...others mergering opportunities like diversify market segments. it could pull up a new market trend.

From : the unknown voice

NinjaTech

September 9, 2008 06:06 AM

Googles AdWords is already bloated with google allowing larger companies to spam keywords that are not specifically relivant to what they offer. It use to be niche companies could distinguish themselves with specific keywords that matched their particular unique products. But now if even one of your keywords that makes up your unique keyword phrase is part of a larger companies bid on that one particular keyword then they automatically fall into that listing as well, and it may not be relivant at all. Google is getting greedy.

Crozie

September 9, 2008 06:45 AM

market dominence huh
look at Netscape ... daaaa

microsoft crushed this company

now its a bad thing?

Jeff Schnaubelt

September 9, 2008 06:45 AM

A Microsoft-Yahoo deal would be much better for the public. Advertisers & consumers would benefit from the increased competition. In the long-run, we'll all be hurt by Google having such a monopoly on search advertising. I hope the Justice Department can prevent this from happening.

Jeff Schnaubelt
Japek Internet Marketing
www.japek.com

Vincent

September 9, 2008 01:33 PM

Monopolies are bad. Period. Stop spinning and use your head.

Rob Hof

September 9, 2008 01:41 PM

Vincent: No spinning here, just questions. I'll grant you monopolies generally are bad. However, they're not illegal in themselves--only if Justice decides the monopolist has abused its power. So that's the standard of proof. Also, only in search advertising, not online advertising overall, can Google be reasonably called a monopoly, or at least dominant. In any case, I'd be interested to hear from people in the industry if they think Google has abused its power, and how.

Gary Sharpe

September 9, 2008 03:29 PM

Rob I don't think that Google have abused their power, quite the opposite. Their technology, whilst largely perpetuated by weburban legend; is mostly transparent and freely accessible to anyone. The end users of Google product are many and varied. Most users do not pay for the services or the added value these free products provide. Internet users are fickle, but vote with their mouse clicks. Google Mail is the globes fourth largest mail provider and yet have their 91.4 million users every received any spam from Google themselves, touting their wares? Excepting the controversy of sponsored links inside Gmail aside that is.
Lets not forget Google’s intentions, heralded not just by the Yahoo deal, but also the launch of the Chrome browser; is to assist the end user, the searcher, not the advertiser. Google recognise that long tail keyword searches are indicating a need to focus and refine search engine results pages (SERPs). If all this means that when we type in the search bar and get a more targeted reply to our query, the whole process is more efficient. If we search for something and click through whether that be in an organic search result or paid for result is immaterial from the end user point of view.
If it's something we're interested in, then it's information - if it's not then it's advertising.
The end user is benefitting, the searcher (who is the real customer here) and it will be difficult for the ASA to imply that this end user will be adversely affected by any mergers within the search market.

gary@avaloninternationalmedia.com

Roman Bills

September 9, 2008 04:34 PM

I'm going out a limb here and assuming, all Google wants is for more people to click on their Ads, and when the click on those Ads they want them to find what they were looking for. This is a bad thing for advertisers?

I'd gladly pay double my Avg CPC... IF my conversion rate doubles. There is no doubt that Google needs to tread these waters carefully, but im excited to see what we learn from Goolge Ads showing on the Yahoo network.

Andrew Goodman

September 10, 2008 12:53 AM

@Rob,

I've always been an advocate of the position Google takes against "sucky" ads and do try to go to some lengths to explain the mindset Google takes to 'tight targeting', which is powerful and does work online. That said, they've baked in pricing power as well, especially in high demand markets (the U.S.) -- indeed, Google spokespersons have admitted (in the previous version of the algorithm) that minimum bids (these are now abolished but the principle is the same) are relaxed in "less mature markets." In other words, Google can effectively set reserve pricing on keywords and it can tinker with profit margins a fair bit -- an eventuality it has dreamt about since they first started experimenting with (highly unpopular) reserve prices in late 2002.

Regardless of monopolistic power, in a world of ROI measurement, prices on ads eventually rise to somewhere close to parity, so I think even if there were four strong players, people would eventually wind up paying full price for ads in the search space.

Stuart Meyler

September 10, 2008 07:18 AM

Ever run a PPC campaign on Google? It doesn't sound like it from your article. The system is not an auction, at least not in any classic definition of what an auction is. Prices are partially set by advertiser demand, and partially set by Google's opaque system of setting a "quality score" to an keyword.

The system also, by our experience, doesn't always show the "better" ads (I have ads with a 25% conversion rate that have been hit with increases in pricing and many others in the SEM industry can share similar woes). It is, however, definitely adept at showing ads that will benefit Google (i.e. high click through/high cost).

If it is an auction, wouldn't the ad with the highest bid and quality score show 100% of the time if the budget allowed it? Got news for you; it won't. Google rotates ads to seek to get more money out of the system. There may be nothing wrong with that but please stop calling it an auction.

Karla Major

September 11, 2008 04:40 PM

Ironically, many of the ANA clients have little to no traction in search yet, as nimbler competitive companies accelerate in search marketing.

Search is being exploited for branding and conversion by newer, faster brands who aren't part of the ANA CMO revolving door.

Francesca R

September 16, 2008 02:53 PM

Google Yahoo Merger

If you would like to learn more about the Google Yahoo Merger, watch this video from Industry expert Dan Savage. Mr. Savage discusses how Google destroyed his business and the impact that a Google Yahoo Merger could have.

Post a comment

 

About

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.

Categories

 

BW Mall - Sponsored Links

Buy a link now!