Congress Finally Gets Why the Google-Yahoo Search Deal is So Bad

Congress is finally understanding the reality of the Yahoo-Google search deal, and what it means for the state of search competition in general. It’s not about price fixing advertising rates, it’s about neutering the second place market participant.

As I wrote on September 27, the current deal between Yahoo (YHOO) and Google (GOOG) will inevitably lead to the decline of Yahoo’s core search advertising business. They will insert Google ads to push revenue. But as they do so, they’ll give advertisers an increasing incentive to just go to Google for their ad management. The disparity between Yahoo's and Google’s revenue-per-ad models will grow, which will further encourage Yahoo’s reliance on Google. The result will be a Google monopoly in search advertising. And instead of competing for that monopoly, they get paid for the privilege:

But the test results showed just how dramatically Yahoo can increase cash flow with Google ads. The more Google ads are shown, the more money Yahoo makes. And in a world where all that really matters is the financial results in your next fiscal quarter, the incentive to use more rather than fewer Google ads will be too large of a temptation.

Yahoo will be able to fine tune their financial results simply by turning up the volume on Google ads v. their own. Every time they do that they mortgage their future because they give more network power to Google’s ad system (advertisers want volume and will pay a premium for it). In other words, Yahoo will be making constant cost benefit decisions weighing short term cash flow v. long term competitiveness. Human nature and simple financial market psychology tells us unequivocally that cash will win and Yahoo’s ad network will lose.

Yahoo’s ad network will continue to erode further as they choose cash over competitiveness, creating a viscious downward cycle. As the fiscal quarters march relentlessly on, Yahoo will rely more and more on Google to make their revenue and earnings numbers.

This is the same tune I and others have been singing all summer.

Now Sen. Herb Kohl (D - Wisc.), chairman of the Senate Antitrust Committee, is taking the argument a step further. In a letter to Assistant Attorney General Thomas Barnett, he outlines a similar argument and urges the DOJ to “intervene to protect competition” in the event “Google is gaining a dominant market position” (yeah, too late). He wrote (emphasis added):

In addition, many interested parties are also apprehensive that if the transaction is consummated, Yahoo will have less incentive to compete against Google, as it will rely upon its main competitor for a significant increase in its revenue. Therefore, critics contend that an advertiser will have an incentive to bypass Yahoo entirely and only bid for Google advertisements since an advertisement purchased with Google could be placed on both Yahoo and Google’s search result pages. Opponents further argue that as Yahoo increases its revenues by placing Google’s advertisements on Yahoo’s search result pages, Yahoo will only seek to expand this activity. As a result, some argue that over time Yahoo will no longer be a significant competitor in the internet advertising market.

The full letter is here.

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Comments

[Obama is Bu...:]

Cable companies (and local broadcast TV stations) generally do not sell there own advertising. They "generate" content (OK, often they buy content) and then sell advertising space to national ad agencies who actually place the ads.

Why does Yahoo have to sell the ads themselves? Why is it a bad thing if Yahoo focuses on generating better content -- better news aggregation, special interest group pages, financial / stock data, etc -- and then sell ad space on those pages to Google or whomever else?

I don't need 6-10 different versions of yellow pages in my house -- despite what the phone companies seem to think. Which one is the "real" Yellow Pages? is a question for the phone companies lawyers to argue about. I just need one, and its usually which ever one happens to arrive first. Often, I find a good local business by asking friends / neighbors, not by any of the "competing" Yellow Pages. The "competition" between Yellow Pages directories is all in some regulators head.

I don't need a half dozen search engines either. Google works just fine, so I don't need another search just like them. Google will get replaced if/when someone develops a ***better*** search, not just another search.

If Yahoo is unable to compete in doing internet search -- they need to create other content. People still read many special interest magazines even after we throw the surplus Yellow Pages directories in the recycle bin.

2008 Oct 06 12:38 PM

[andyn:]

I dont understand the point of this article.
YAHOO deliberately went to Google's arms to jilt Microsoft.
Yes, this might not be the best deal from a consumer's point of view, but I dont think Yahoo was thinking about them.
YHOO is a dead man walking... buy lots of puts on them.
GOOG is a winner, regardless of how this turns out and is way too cheap here at $370. BUY BUY BUY.

2008 Oct 07 09:30 AM