Google vs. Microsoft – The Google/Yahoo Ad Deal

The battle between two of the biggest tech firms in our history continues to wage on: Microsoft vs. Google

The Google/Yahoo Ad Deal

Google’s ad deal with Yahoo, announced in July, is to be put into effect next month. Currently, it is still under regulatory review as it would represent a HUGE chunk of the search advertisement market – we’re talking somewhere in the 90% range. Google already owns 70% share in the search advertisement market and is already the number one most used search engine.

Guess who is trailing, although far behind, in second? That’s right, their newest partner: Yahoo Inc.

If that’s not MONOPOLY, how else would you define that term? Wasn’t that term most popularly associated with the real estate board game where the goal was to own every piece of property in order to win? I am no expert, but when you own 90% of the properties, I think the game is pretty much over.

But a monopoly , by defintion controls only the supply side of a transaction. In this case, Google’s platform remains an open consumer auction. If prices go too high, users will stop buying (demand elasticity). As a monopoly, you can charge much higher prices than you otherwise would be able to because you don’t have a competitor who can undercut you for less profit.

Google’s “voluntary” sumbission review of this deal to regulatory bodies is likely to get approved.

No wonder Microsoft is upset – this deal was supposed to be theirs.

Google landed a huge blow by helping Yahoo fend off the takeover by Microsoft earlier this year and then came back and landed an uppercut by signing the ad deal with Yahoo shortly after.

The deal now meant some ads that visitors see on Yahoo’s search results page would be supplied by Google. Yahoo expects it will bring in $800 million annually in additional revenue because some search phrases get better results on Google, and some search phrases draw a plentiful number of advertisers on Google but none at all on Yahoo.

Last Thursday, Google’s Tim Armstrong, President of Advertising and Commerce in North America had this to say:

Question: Will the Google-Yahoo! agreement raise ad prices?

Answer: Neither Google nor Yahoo! set ad prices. Ads are priced by an auction where an advertiser only bids what an ad is worth to them. Furthermore, ad price is only one part of the story. A more important measure for advertisers large and small is the return on investment of their advertising dollar. The Google-Yahoo! agreement will help advertisers convert more clicks into customers by showing more relevant ads on Yahoo!, giving advertisers a better return for every dollar they invest.

Question: Yahoo! claims they will make an extra $800 million from this deal. Does that money come out of advertisers’ pockets?

Answer: There are two main reasons Yahoo! is likely to earn more revenue. One, the deal will allow Yahoo! to show more ads on pages where they previously showed no ads or only a few ads. Two, advertisers will get more clicks on ads because the quality and relevance of those ads will be better. As is true today, advertisers are ultimately in control of how much they spend because they only pay what an ad is worth to them. So consumers will see more relevant ads and advertisers will attract more customers as a result.

Question: Can Yahoo! pick whose ads to show based on who has the highest price?

Answer: No. Under the terms of our agreement Yahoo! won’t be able to see the current auction prices for Google ads, and Google won’t be able to see Yahoo!’s prices.

Question: Does Google’s quality score effectively raise prices for ads?

Facts: A quality score helps ensure that users see the most relevant ads not just the most expensive. All the major search engines, including Yahoo! and Microsoft, assign quality scores. Quality score is a formula that reflects which ads consumers prefer based on how they respond to the ads. By including quality score in our advertising system, smaller companies can more effectively compete with larger businesses by creating highly relevant ads and websites.

Google’s critics — led by Microsoft, of course had something to say. After the one-two blow from Google earlier this year, they took this as a chance to depict Google as a price-controlling monster (Google and Microsoft have a lot of similarities, it seems). In July, Brad Smith, Microsoft’s general counsel said, “Never before in the history of advertising has one company been in the position to control prices on up to 90 percent of advertising in a single medium.”According to Mr. Smith, the $800 million revenue gain for Yahoo is going to come “out of the pockets of American businesses, big and small, who will pay higher prices.”

So how did Google respond?

On September 19, Tim Armstrong had a few more things to say:

Question: Is this agreement bad for competition?

Answer: Just the opposite. This agreement – unlike Microsoft’s proposed acquisition of Yahoo! – means that Yahoo! will remain an independent company in the business of search and advertising. Yahoo! has stated that it will reinvest the additional revenue from this agreement into improving its user services and competing vigorously against Google, Microsoft and other companies. This is similar to other standard business practices where competitors share components. In addition, the agreement is non-exclusive, meaning Yahoo! could make a similar deal with another company.

Question: Some claim that Google and Yahoo! will have a combined 90% of the search advertising market. Is this true?

Answer: No. This agreement is not a merger. This is about expanding the pie, not dividing it differently. Yahoo! will continue to run its own search engine and advertising system. Yahoo! will benefit from Google ads in areas where they have low ad inventory and maintain control over how much and what inventory they make available to Google. Yahoo! will invest additional revenue in remaining a viable competitor in advertising.

Question: Will Google benefit from access to Yahoo!’s user data?

Answer: No. We have taken steps in the Yahoo! agreement to make sure that neither company has access to personally identifiable user information from the other company.

Question: Over time, will Yahoo! just outsource more and more of its ads to Google and cease to exist as an independent ad platform?

Answer: Yahoo! has made clear that it will still use its own system to serve ads, and it will use extra revenue from this deal to improve its ad platform. The arrangement only covers the U.S. and Canada, and does not cover the fast-growing mobile segment. Yahoo! also has a strong economic incentive to keep serving as many of their own ads as possible, since they get to keep all of the revenue from those ads, while Yahoo! will only receive a part of the revenue from ads served by Google. In addition, Yahoo! has a leading position in display advertising, and will be able to offer advertisers a unique combination of advertising opportunities.

Question: Once the deal is implemented, why would advertisers keep advertising on Yahoo!?

Answer: Yahoo! will make the sole decisions about when to use Google ads. They have stated that their plan is show them primarily on pages where few or no ads currently appear. The only way for an advertiser to guarantee placement for their ads on Yahoo! is to advertise through the Yahoo! platform itself.

The online advertising space is a competitive environment, and we believe that this agreement only furthers that competition. Consumers will see more relevant ads, advertisers will have new ways to reach customers more efficiently, and website publishers will benefit from our ad matching technology.

With this new deal, Google now has access to the insight of the searches and the activities of Yahoo! users. So not only are they going to be receiving this information to further their research and battle tactics in the search advertisement war, they’re going to get paid BIG for it!

Google may not have direct access to Yahoo’s data but they have access to their adwords and with that, can drum up some very useful user Yahoo user information.

Wow. Imagine getting paid by your enemy to receive their intel…

For the short term, this will open up much-needed revenue for Yahoo and most likely benefit the overall consumer, as Google has promised. This may also lower prices of auctions as inventory has now increased.

But in the long-term, just like Facebook, MySpace, Digg, Aol, and especially Ask, Yahoo will rely heavily on Google to provide them a large portion of their revenue. So what happens when it’s time to renogotiate these deal-breaker contracts?

Looks like Google will most likely be setting the terms then…

Google, you really are the smartest guys in the room.