Why the Yahoo! Search Revenue Gap Won't Close

In spite of Yahoo! accepting revenue guarantees for another year from Microsoft, recently there has been speculation that Yahoo! might want to get out of their search ad deal with Microsoft. I am uncertain if the back channeled story is used as leverage to secure ongoing minimum revenue agreements, or if Yahoo! is trying to set the pretext narrative to later be able to push through a Google deal that might otherwise get blocked by regulators.

When mentioning Yahoo!'s relative under-performance on search, it would be helpful to point out the absurd amount of their "search" traffic from the golden years that was various forms of arbitrage. Part of the reason (likely the primary reason) Yahoo! took such a sharp nose dive in terms of search revenues (from $551 million per quarter to as low as $357 million per quarter) was that Microsoft used quality scores to price down the non-search arbitrage traffic streams & a lot of that incremental "search" volume Yahoo! had went away.

There were all sorts of issues in place that are rarely discussed. Exit traffic, unclosible windows, forcing numerous clicks, iframes in email spam, raw bot clicks, etc. ... and some of this was tied to valuable keyword lists or specific juicy keywords. I am not saying that Google has outright avoided all arbitrage (Ask does boatloads of it in paid + organic & Google at one point tested doing some themselves on credit cards keywords) but it has generally been a sideshow at Google, whereas it was the main attraction at Yahoo!.

And that is what drove down Yahoo!'s click prices.

Yahoo! went from almost an "anything goes" approach to their ad feed syndication, to the point where they made a single syndication partner Cyberplex's Tsavo Media pay them $4.8 million for low quality traffic. There were a number of other clawbacks that were not made public.

Given that we are talking $4.8 million for a single partner & this alleged overall revenue gap between Google AdWords & Bing Ads is somewhere in the $100 million or so range, these traffic quality issues & Microsoft cleaning up the whoring of the ad feed that Yahoo! partners were doing is a big deal. It had a big enough impact that it caused some of the biggest domain portfolios to shift from Yahoo! to Google. I am a bit surprised to see it so rarely mentioned in these discussions.

Few appreciate how absurd the abuses were. For years Yahoo! not only required you to buy syndication (they didn't have a Yahoo!-only targeting option until 2010 & that only came about as a result of a lawsuit) but even when you blocked a scammy source of traffic, if that scammy source was redirecting through another URL you would have no way of blocking the actual source, as mentioned by Sean Turner:

To break it down, yahoo gives you a feed for seobook.com & you give me a feed for turner.com. But all links that are clicked on turner.com redirect through seobook.com so that it shows up in customer logs as seobook.com If you block seobook.com, it will block ads from seobook.com, but not turner.com. The blocked domain tool works on what domains display, not on where the feed is redirected through. So if you are a customer, there is no way to know that turner.com is sending traffic (since it’s redirecting through seobook.com) and no way to block it through seobook.com since that tool only works on the domain that is actually displaying it.

I found it because we kept getting traffic from gogogo.com. We had blocked it over and over and couldn’t figure out why they kept sending us traffic. We couldn’t find our ad on their site. I went to live.com and ran a site:gogogo.com search and found that it indexed some of those landing pages that use gogogo.com as a monetization service.

The other thing that isn't mentioned is the longterm impact of a Yahoo! tie up with Google. Microsoft pays Yahoo! an 88% revenue share (and further guarantees on top of that), provides the organic listings free, manages all the technology, and allows Yahoo! to insert their own ads in the organic results.

If Bing were to exit the online ad market, maybe Yahoo! could make an extra $100 million in the first year of an ad deal with Google, but if there is little to no competition a few years down the road, then when it comes time for Yahoo! to negotiate revenue share rates with Google, you know Google would cram down a bigger rake.

This isn't blind speculation or theory, but aligned with Google's current practices. Look no further than Google's current practices with YouTube, where "partners" are paid different rates & are forbidden to mention their rates publicly: "The Partner Program forbids participants to reveal specifics about their ad-share revenue."

Transparency is a one way street.

Google further dips into leveraging that "home team always wins" mode of negotiating rates by directly investing in some of the aggregators/networks which offer sketchy confidential contracts < ahref="http://obviouslybenhughes.com/post/13933948148/before-you-sign-that-machinima-contract-updated">soaking the original content creators.:

As I said, the three images were posted on yfrog. They were screenshots of an apparently confidential conversation had between MrWonAnother and a partner support representative from Machinima, in which the representative explained that the partner was locked indefinitely into being a Machinima partner for the rest of eternity, as per signed contract. I found this relevant, informative and honestly shocking information and decided to repost the images to obviouslybenhughes.com in hopes that more people would become aware of the darker side of YouTube partnership networks.

Negotiating with a monopoly that controls the supply chain isn't often a winning proposition over the long run.

Competition (or at least the credible risk of it) is required to shift the balance of power.

The flip side of the above situation - where competition does help market participants to get a better revenue share - can be seen in the performance of AOL in their ad negotiation in 2005. AOL's credible threat to switched to Microsoft had Google invest a billion Dollars into AOL, where Google later had to write down $726 million of that investment. If there was no competition from Microsoft, AOL wouldn't have received that $726 million (and likely would have had a lower revenue sharing rate and missed out on some of the promotional AdWords credits they received).

The same sort of "shifted balance of power" was seen in the Mozilla search renewal with Google, where Google paid Mozilla 3X as much due to a strong bid from Microsoft.

The iPad search results are becoming more like phone search results, where ads dominate the interface & a single organic result is above the fold. And Google pushed their "ehnanced" ad campaigns to try to push advertisers into paying higher ad rates on those clicks. It would be a boon for Google if they can force advertisers to pay the same CPC as desktop & couple it with that high mobile ad CTR.

Google owning Chrome + Android & doing deals with Apple + Mozilla means that it will be hard for either Microsoft or Yahoo! to substantially grow search marketshare. But if they partner with Google it will be a short term lift in revenues and dark clouds on the horizon.

I am not claiming that Microsoft is great for Yahoo!, or that they are somehow far better than Google, only that Yahoo! is in a far better position when they have multiple entities competing for their business (as highlighted in the above Mozilla & AOL examples).

Published: May 14, 2013

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Comments

May 15, 2013 - 6:32am

Big decision from yahoo let's see how will it effect search world?

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