Yahoo! in Search Ad Test With Google

NEW YORK In what could open a new front in its battle with Microsoft, Yahoo! said it would begin a test of running search ads supplied from longtime rival Google.
Yahoo! will test running Google search ads next to 3 percent of its U.S. search results over the next two weeks. The company could then evaluate whether it would stand to generate substantially more revenue using Google ads rather than those placed through its Panama ad sales system. Yahoo! will continue to use its own search technology
Outsourcing its search results to Google would amount to a stunning about-face for Yahoo!, which has battled Google tooth and nail in the search market since it bought its own algorithmic search technology and paid search system in Overture in 2003. It devoted considerable resources into overhauling its paid search platform last year, debuting Panama in October 2006.
Yet Yahoo! has been unable to match Google in the market. Its search share has continued to fall while Google’s grows. The situation has set off a dynamic where Google is able to attract more searches, more advertisers and even higher price clicks.
Yahoo! has resisted suggestions it contract out search to Google on both antitrust grounds — together they represent 80.8 percent of Internet searches, per ComScore — and because it sells both display and search ads together. Yahoo! combined its brand and search advertising teams in June 2007.

The test comes as Yahoo! seeks alternatives to Microsoft’s $42 billion takeover offer. Over the weekend, Microsoft set a three-week deadline for Yahoo! to begin negotiations, a demand Yahoo! rebuffed by restating its contention the offer undervalues the company.

Nearly immediately after Yahoo!’s announcement of the Google test, Microsoft issued a statement from Brad Smith, its general counsel, raising antitrust concerns: “Any definitive agreement between Yahoo! and Google would consolidate over 90 percent of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo! We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo! shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers and consumers.”

Although Google could argue that the auction-based nature of the search market makes it open to competition, the plan would still run into opposition from advertisers, predicted Bryan Wiener, CEO of 360i, a New York digital agency. “There’s a fair amount of opaqueness in the auction,” he said. “It’s not entirely clear what price it takes to win. They’re making algorithmic changes that are proprietary.”

He added, “This would create a monopoly where Microsoft-Yahoo! would consolidate the second and third place players.”

“Yahoo!’s biggest competitive advantage is they have the best combination of search and display,” Wiener said. Their display network is better than Google’s. By eliminating the ability to integrate search and display, it is a significant retreat from their ability to provide marketers with integrated campaigns.”

Yahoo! said in its statement that it would not comment on a possible future agreement with Google. The company noted that “the testing does not necessarily mean that Yahoo! would join the Adsense for Search program or that any further commercial relationship with Google will result.”