Yahoo Tweaks Its (Advertising) Algorithm

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yahoo-logo.pngDid Yahoo just raise its prices for search ads? Yesterday, Yahoo made a significant change to its advertising bidding system by removing the minimum bid for sponsored search keywords. The minimum bid used to be $0.10 per keyword. Now, the minimum bid will be set more dynamically based on two factors: the quality of the advertiser and the value of the keyword.

In theory, advertisers whose ads are clicked on more often will be rewarded with lower minimum bid requirements. But the past popularity of a keyword also goes into the equation, so a keyword that has been bid up in the past could also result in a higher minimum bid. So minimum bids have now become dynamic, and no single advertiser really knows what they are until they put in their bid for a specific keyword.

Already some search advertisers are complaining that their minimum bids have gone up 2X to 4X overnight. At this point, that is just anecdotal evidence. We will have to wait until the end of this quarter to see if the change has had any material impact on Yahoo’s revenues.

What is curious about this move is that it suggests that many keywords on Yahoo get bought at the minimum price, without any real competitive bidding going on. After all, if at least two advertisers are bidding for a keyword that means the minimum bid is no longer an issue. So it makes you wonder how effective Yahoo ad auction system is as a market. For a market to exist, there needs to be at least two bidders.

Conversely, the advertisers with the highest click through rates will now be in a position to buy up keywords below the point where lesser advertisers even hit their minimum bid. And that is not really a market either. For instance, if TechCrunch is awarded a minimum bid of $0.06 for the term “startup” and a Silicon Valley law firm needs to pay $0.15 for the same term (I am just making these up), TechCrunch could buy up the term all day at $0.06 if the law firm does not bid its $0.15. In that scenario, there would be even less competition than if everyone had the same minimum bid. But maybe Yahoo does not care so much about creating a market as it does about improving the quality of the ads on Yahoo search.

Any Yahoo advertisers out there seeing their prices go up? Any seeing their prices go down? Is this a good move for Yahoo ora bad one? Please share in comments.

Yahoo’s new minimum bid policy for search ads will . . .

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Started: April 18, 2008

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