Will the Google/Yahoo Deal Lead to Increased Pricing?

By Aaron Goldman, VP Marketing & Strategic Partnerships

Of the many angles to the Google/Yahoo plotline, one of the most compelling is the impact this partnership will have on pricing.

From a Yahoo perspective, there are 2 schools of thought:

1. Prices on Yahoo will decrease as its diminished relative importance in the search ecosystem causes small advertisers to focus budgets solely on Google where they can have access to ~85% of US search queries in one fell swoop. In an auction marketplace, a decrease in demand begets lower pricing.

2. Prices on Yahoo will increase as advertisers attempt to capture more volume knowing that Yahoo will prioritize ads that pay out higher than Google syndication. In other words, since Yahoo has to share revenue for each click generated via Google, if bid price and click-thru-rates (CTR) are equal for a particular keyword, Yahoo will show its own ad. Certainly, if the bid price via Panama is higher and the CTR is equal, Yahoo will show its own ad.

As far as Google goes, I can't see how pricing does anything but increase as it becomes even more of a must buy for search advertisers. Of course, it's not always that cut and dry with quality score algorithms taking into account other factors beyond bid price. However, we have no reason to suspect any of the other variables will "loosen up" so if bid prices go up, so does the overall equation.

And, similar to my point #2 above for Yahoo, advertisers looking for more volume may increase their bids on Google knowing that Yahoo will prioritize Google ads if they yield a higher effective CPM.

Either way, since advertisers will have no visibility into when/where Yahoo will show Google ads, in order to maximize volume, it is imperative that advertisers have active campaigns on both Yahoo and Google.

Let's play this out with a potential scenario:

Advertiser A is bidding $1 on Yahoo for Keyword X and achieving a CTR of 1%.

Meanwhile, Advertiser A is bidding $1.25 on Google for Keyword X with a CTR of 1%.

Now, let’s assume the revenue share on this deal is 90/10 in Yahoo’s favor. Note: I have no insight into the actual terms of the deal as they were not disclosed but this is my best guess based on general industry knowledge.

Let's also assume the Keyword X query originates at Yahoo.com so we don't have to take into account any rev. share for Yahoo's partners across its search network.

If Yahoo shows its own ad, it can expect a net effective CPM of $10 ($1*1%*1000). So, for every 1000 times it shows its own ad, Yahoo will net $10.

If Yahoo shows Google's ad, it can expect a net effective CPM of $11.25 ($1.25*1%*1000*90%).

In this case, presumably Yahoo will show Google's ad.

However, with an advanced bid management tool in place testing the elasticity of the new Yahoo environment, Advertiser A increases its bids incrementally in a desire to get more volume from Yahoo without having to pay Google's inflated rate of $1.25 CPC. Advertiser A finds that the sweet spot is $1.15. This nets a $11.50 eCPM and pushes Yahoo to prioritize its ad over Google syndication. In this case, pricing on Yahoo goes up but Advertiser A still saves $0.10 by being active in Yahoo as opposed to only running on Google.

Now, back to quality score for a moment -- raising bids is not the only way to get Yahoo to prioritize your ad. Another effective means is creative testing.

If Advertiser A can improve its CTR to 1.1%, it would give Yahoo an eCPM of $15 and cause it to prioritize that ad over the Google ad.

Of course, by the same token, Advertiser A could focus its optimization efforts on Google in an attempt to garner more volume via Yahoo distribution but it would have to work 10% harder to close the rev. share gap.

Then again, with Google, there are many other ways to improve quality score outside bid price and CTR -- e.g. landing page quality and load time.

Bottom line, there is no clear answer regarding the impact of this deal on pricing. Suffice it to say, a keen focus on tight campaign management and optimization is as important as ever as advertisers look to gain every last advantage in a tough economy. And, for those looking to maximize the volume opportunity, having active campaigns on both Yahoo and Google is a must.

At the end of the day, this deal was about driving more revenue for Yahoo and it looks like it will accomplish that. I doubt many advertisers will close down their Yahoo accounts knowing it may be more expensive for their ads to show up on Yahoo via Google. More likely, advertisers will increase bids and/or work to improve CTRs to capitalize on the efficiencies to be had when Yahoo prioritizes its own ads over Google's.