Yahoo! Turns to Google for Help

NEW YORK Yahoo! announced last week that it had struck a search advertising deal with rival Google, betting it can increase revenue through the arrangement and still pursue its strategy of marrying search and display advertising.

Yahoo! executives have said they believe the search and display ad markets will converge in the near future. This tenet led the company to rebuff a lucrative offer from Microsoft to buy its search business. Instead, the Google deal, which covers the U.S. and Canada, will generate $250 million to $450 million in additional cash flow, Yahoo! said.

The Google deal outsources part of Yahoo!’s search advertising business. Yahoo! executives did not provide estimates of how many of its search results would carry Google ads rather than its own. Yahoo! president Sue Decker said Google ads would mostly appear for “tail” results, for which Google generates more revenue because of its larger advertiser base.

Decker said this is consistent with Yahoo!’s strategy of developing an open platform for the buying and selling of online advertising. For instance, it has deals with hundreds of newspapers, allowing them to extend ad campaigns onto Yahoo! pages.

The danger for Yahoo! lies in attempting to have it both ways, said Bryan Wiener, CEO of 360i, a New York digital agency. Google’s share of searches is already 62 percent, according to comScore, but Wiener said, among 360i’s large-company client base, its share of search advertising dollars is much greater than that. Yahoo! draws about 17 percent of searches. If it falls much below 15 percent, it will no longer be efficient for advertisers to participate in it, effectively giving Google a near-monopoly in the vital search ad market.

“This partial outsourcing is going to be greeted by marketers as a confusing message about whether they’re in this for the long term,” Wiener said. “It hurts the perception of them being an integrated search and display platform.”