Why the Google-Yahoo Ad Deal Is Something to Fear

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Randall Stross at The New York Times goes to bat for the Google/Yahoo search marketing deal, saying there’s “nothing to fear” from the two companies linking their search products. I believe most of his analysis is wrong, and he also skips the publisher side of the market entirely. In short, I feel that he is exactly wrong in both his approach and his conclusions.

He begins with “GOOGLE controls about 70 percent of the search advertising market. Doesn’t that give it a monopolist’s ability to set prices as high as it wishes?”

Well no actually, a monopoly controls only the supply side of a transaction, so it can’t change whatever it wants. If prices go too high, users stop buying (this is known as demand elasticity). Being a monopoly just gives you the ability to charge much higher prices than you otherwise would be able to because you don’t have a competitor who can undercut you for less profit.

But Stross skips that analysis and jumps into the meat of his argument. Ad rates are set by auctions, not dictated by Google, he says, so Google has no control over the pricing of those ads. If ad rates go up, it is just the market doing its thing.

This is the focus of his article – saying that there may not be any ad rate increases (which is absurd on its face), and alternately saying that if the rates increase it is simply the market responding to more robust ad auctions.

At the end of the day, advertisers will pay only what they want to get the ads they need. Most advertisers closely track ad performance to return on investment. If bids go up, they step back.

The real long term win for the networks is to build a commercial relationship directly with advertisers. Google has far more of them, because they’re chasing the massive search page views that Google supplies them. The more advertisers bidding, the higher the price.

With the addition of Yahoo search queries, there will be even more inventory, and even more incentive for those advertisers to jump on the Google platform.

So one centralized marketplace equals the highest economic rent to Google, which they can then share with third parties.

And that’s the big piece of the puzzle that Stross ignored. In May I wrote about the very real impact that a single search marketing provider will have on the rest of the companies in the Internet ecosystem, which tap into those networks for revenue.

On the publisher side things are even worse. Google doesn’t share enough revenue with content sites that show their ads. The only thing keeping them even close to honest is the fact that Yahoo and Microsoft will occasionally compete for those partners. Take that away, and Google will go back to keeping the majority of advertising revenue generated at those sites (their only competition will be other types of advertising, which generate far less revenue). That is a terrible outcome when you look at it from the perspective of the health of the Internet.

Microsoft can’t ignore the online advertising market, it’s just too big and important. And we need to be behind them in this effort, because if Microsoft and Yahoo lose interest, we’ll be stuck with a monopoly, and the Internet will suffer. Competition drives innovation. Competition drives prices down. To wish this away is irresponsible.

Those third party companies (like MySpace, Facebook, Digg, Ask, AOL and now Yahoo) are at the long term mercy of Google when their first agreements come up for renegotiation. Google may give Yahoo most of the revenue today from Google ads, but in ten years when Google is the only player in town, look for the terms to move towards a more standard Monopolistic model. Today Google is kept in check via competitive deals where Microsoft or Yahoo are willing to actually lose money to win away the partner from Google, and get control of those search queries.

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