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 and Google 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 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.
Comments
First off, googlopoly will end the “free” ( 3rd party sponsor) information & awesome widget/gadget business model as we know it.
Second, this is why we should have more of younger generation running the US government, because majority of the older generation just DOESN’T get the internet and the information business!
“we should have more of younger generation running the US government, because majority of the older generation just DOESN’T get the internet and the information business!” –good point, very wrong reason.
Understanding the Internet and the IT business [?] does not qualify the ‘younger generation’ to run the US government. although eventually they will… when they GET OLDER!
You are probably thinking about Barak Hussein, who does not know s**t about anything, although he promises everything in order to move to the White House…
But, wait! his qualifications for being the president are… being a Chicago “community organizer” –Whatever s**t than means!
Wow?
this guy smells like a racist in my book.
To Yayo - For Hispanics, everyone else is a racist, right?
Really, how does a “racist” smell?
While you are at it, please let us all know, please educate us all –and PLEASE, do not refer us to Obama’s site!
–What is Obama’s experience?
–What are his great accomplishments, the ones that would qualify him to be the President of the United States?
–What are his qualifications to be the Commander in Chief of the US Armed Forces?
–What are his experiences related to international relations [that means knowledge of other countries' culture, government, bilateral agreements, etc ] other than attending a ["mostly" muslim--lol.lol.lol] a Madrassa Islamia in Indonesia? –Yes! he is a closet muslim, and yes, he speaks Arabic!!
–I you do not understand all this, go to Dictionary.com. not “Youtube”
Peter
Hey retard, : “I you do not understand..”
Um, what more can I say, you are simply a douche. To whit:
1) What does Obama have to do with this conversation (es, i am aware he could be relevant, but this isnt a political blog
2) You dont know english or are drunk
3) STFU
Michael - if Google makes more money per ad, and the market is efficient, won’t everyone eventually run Google ads or go out of business?
Point is, if Google is gaining more and more market share, Yahoo can either band with Google, make money now, and see where that goes - maybe using the extra revenue to build better tools and more page views so they have more leverage - or they can wither, eventually get eaten by Microsoft, then see that combined presence wither, until Google has that same (psuedo-)monopoly.
I have yet to see a situation where Google leverages their search power to wreck a competitor in another market; and frankly, Microsoft barely got a slap on the wrist for doing that time and again. If we’re really concerned about anti-trust, let’s split the OS division into a separate company. That would do a lot more good for the world and be a lot more morally justified than tampering with Google. Microsoft *has* used its monopoly power for evil - see Netscape, and fast forward to the present and look at the OOXML/ODF/etc debacle.
The issue is whether search ends up a monopoly or a 80/20 type market. If its a monopoly, third parties like Facebook, MySpace, AOL, Ask, Digg and others won’t be able to negotiate the favorable deals they’ve gotten today because it’s a competitive market. If it ends up being a two horse race, we have competition. Also, a monopolist tends not to innovate nearly as much as they would in a competitive market.
The analogy is Intel/AMD. AMD may not make much money from processors, but they keep Intel on its toes and they keep prices down.
Your post really turns me on!
Why do you think that the 80/20 situation could happen? Why would the drivers of Google’s market share gains magically stop at 80%?
America - look across the atlantic to see your fate! Google has 95%-99% search $ market share in all european markets.
Yahoo needs to cash in on a search deal now why it still can, in order to invest in its display ad platform (before Google monopolises that market too)
michael is dead-on. a monopoly in search implies a monopoly in contextual advertising and is bad for every web publisher.
Let me start by stating that I’m not a user of ad services from either Google or Yahoo. However, I do use Google for a variety of services (email, pictures, docs & reader), as well as Yahoo (reading news headlines, sports headlines, OMG, etc).
I understand the lack of competition that will exist in the ad market if Yahoo starts to rely on Google for ad revenue versus their own, but from a user’s perspective, I think this is the direction that Yahoo should go in. They are not going to win versus Google in this arena. However, they do beat Google in terms of being a destination site for various services, at least in my case, for entertainment and news.
With the potential buyout of Yahoo by Microsoft, it made more sense for Yahoo to stay in the ad game, as they would have been merged with Microsoft and held a bit more market share combined. Flying at it solo, Yahoo is looking for ways to increase shareholder value, which for a publicly held company is the name of the game. It would be all well and great to maintain competition in the market, but that’s not Yahoo’s mission, is it.
To this day, it still amazes me that sites can make money by having people click through on ads…
Between this post, and his support for net neutrality, I still don’t believe Michael’s claim of being a Arrington.
HAHA I mean being a libertarian.
the problem is the disruption that occurs in free markets when a monopolist takes over. That’s why net neutrality is important and that’s why a competitive search market is important.
Mike makes an excellent point. What intrigues me greatly is that Congress seems to get this right…
We have to keep in mind that Microsoft and other major players have substantially increased their minions/lobbyists in Washington in the past few years.
Most likely, dark forces [MS] are at work behind the scenes, giving money to the whores on Capitol Hill in order to interfere with free market dynamics…
I personally think that this is the direction Yahoo! had to go in. Let’s face it, Google has already dominated Internet advertising, well a huge portion of it. Every website I go too has Google advertisements on it these days.
This is a perfect opportunity for Yahoo! to cash in on Google’s success. Sure this deal spells doom for many small town advertisers, but Google would get it’s dominance other ways if it didn’t use Yahoo! in the first place.
Let’s face it Yahoo! sucks, Google is king of the Internets now n00bs.
Come on now. Yahoo has all the infrastructure and tools to really compete in advertising. The problem is the people running the company got tired and old. They just need someone with vision to give them life again. It seems like Yahoo doesn’t want to compete and makes me want to grab Gerry Yang, make him watch Unforgiven and say that is what Yahoo needs to do. Drag its sorry ass out of bed and start kicking some ass.
Google is not without its flaws.
Wow! –Yahoo probably needs new people at the top, with a better vision.
Now, “Gerry Yang” is actually “Jerry” as in Springer…
i think we need to look a bit further out.. when advertising online will mean a lot more than search advertising and doubleclick’s basic display business. what tools still need to be conceived/developed for the type of measurement, campaign management, environment placement, integration management etc. etc. etc. that will take advertising on the web beyond where it is today.. and who will dominate then? google, yahoo, micrsoft, newsinc., somebody who don’t know about yet?
Would anyone else give anything to be a fly on the wall during the negotiations between Sunnyvale and Mountain View? With all the DART data, Google already knows exactly what advertisers are paying on Yahoo…for search and display!
Combined with the black-box nature of search pricing, it would be relatively simple for Google to slowly strangle or quickly destroy what is left of Yahoo’s search biz as it chooses.
Dart doesn’t have every advertiser, so Google doesn’t know all the Yahoo pricing details.
But once Yahoo outsources search ads to Google, Google knows much more.
Once Google dominates search ads, it can set whatever price.
Anyone else think it might still be a possibility that Microsoft could acquire Yahoo? Seems like a buyer’s market - you’ve caused most of the top executives to leave, the economy has been doing bad in general, and it seems that Yahoo is desperate to make something happen. I’m sure we can all list more issues that put pressure on Yahoo’s leadership and stock holders, but the basic point is that I still think there’s a slight chance of an acquisition. Yahoo won’t get anything nearly as favorable as they could have before in a simple and clean transaction, but it’ll be better than not.
From a YHOO shareholder, employee & financial point of view, resounding yes.
From a “Jerry is in charge” POV, no way.
A downward spiral for Y! is a possibility but not an inevitability.
Y!’s search monetization is (supposedly) higher on popularly searched keywords than Google’s. It’s the tail part of the keyword universe that Google monetizes better.
For Y! to end up outsourcing search monetization completely to Google, Y! must lose relative competitiveness across all types of search keywords.
Otherwise, advertisers will continue to do business with Y! for the following reasons:
(1) Y! still monetizes certain keywords better on Y! Search
(2) Y! also offers access to display and video advertising on Y! properties and its network of publishers.
Doing business just with Google would mean missing out on these opportunities.
So Mike, where are we come end of Q42008?
Will the Google deal be kicking full steam or will they be stuck in purgatory? Or none of the above? Would love for you to dust of that nostradomus hat
why cant yahoo release the “patent 361 keyword auction system to everyone” free or for a fee? this would remove goog from controling the head of the advertising cpc auction snake.
why has yahoo has been reluctant to offer the same style easy to use ad system like googles adsense?
why is yahoo so reluctant to expoit the patent 361 like Goog has been doing.
I sense a conspiracy. What the hell is really goin on.
yahoo has been easy prey for goog for years now. they just let them live to appear there is competition. look at the stock price differentiation. there should have been a congressional hearing on why the two companies 1 and 2 in search share price could be so far apart.
I own a monopoly of niche location based domain names. will i stifle competition? you damn well better believe it.
PlayNoGames.com:)
i think this not good for yahoo because their object will reduce
In Spain we already have a Google monopoly with a 95% share of text search.
Vincent: “Flying at it solo, Yahoo is looking for ways to increase shareholder value, which for a publicly held company is the name of the game.”
But wasn’t it Jerry who did everything to kill the MSFT buyout when most Yahoo shareholders supported the deal?
I think it would be a real nightmare if the google and yahoo deal went through, google already control the majority of users search engine experience and this will give it the most unfair competition to the extent that I don’t think we will ever see another search engine company enter the market.
what would be the future of the Yahoo! search partners? they have been loosing a lot of them, but they still have some big one and if they all switch to Google, then… that’s a monopoly everywhere. we will be saturated of “Google Ads”
I’m just happy that Microsoft don’t dominate the the search engine marketplace as well as the office software one, we’d have to pay for everything!
I think Michael is spot on with his position here. There needs to be competition in this space. Internet advertising is going to continue to grow in the future and replace other methods such as newspaper as a preferred type of media.
Even if it makes it through the U.S., Google is making a mistake in thinking that they will not have difficulty in Europe. This is a bad deal for all involved. Perhaps, Yahoo needs an infusion of cash to prevent a deal altogether.
Honestly, I think all sides will not prosper from the deal including publishers and advertisers. Each engine has a different reach and depending on the advertising budget, a company has more than one option.
It will be hard to monopolize a market with zero switching costs. Interesting article a few posts below this one on TC about “…the seeds of the next big thing…”.
What do you want Michael: Government to regulate a market, or innovation to go after an inefficient monopolist???
Interesting to see a site that should be dedicated to innovation and free markets so strongly advocate for government intervention.
If Google had the advantage of a natural monopoly (utilities, MSFT) then I’d be worried.
Google has more to worry about with their inability to achieve true innovation than the market has to worry about Google having a short-term monopoly on search advertising.
“It will be hard to monopolize a market with zero switching costs.”
You can’t actually be serious. You’re either severely delusional or just dumb.
You’re just using random words you’ve heard without knowing what they mean. stop it. please.
Since when is it the government’s position to guarantee competition? This is the free market at work and if businesses fail as a result, they fail. Look at what a swell job the government did in manipulating the housing market through repeated distortions of the free market with CRA/Fannie/Freddie. And how well the airline market did under regulation.
Think government regulation is a good thing? Remember that in 1984 it cost $0.35/minute for long distance calls and AT&T was going to be given all the cellular spectrum. Deregulation made telecom a somewhat healthier market, don’t you think?
If a business chooses to go a certain route, and the stockholders approve, why should the government step in? If there’s a void someone in the market will fill it the same way that Google did when Yahoo did a lousy job on search. When Friendster didn’t address their market properly Facebook stepped in. When newspapers didn’t address their market properly, blogs - like this one - stepped in.
Government is for insuring the safety of citizens and handling common infrastructure (emergency services, military, roads, etc.) that everyone uses. NOT for insuring competition or trying to level the playing field.
Yes, ideally that is the role of the government. However, Congress is crawling with liberals, forever pushing for socialism. Hillary, is partially out of the picture now [remember her failed health care project? ] –Although a worse one is desperatey trying out there: the communist-lover Barak Hussein Obama!
“Socialism” ?
“Communist Lover” ?
“Hussein” ?
C’mon, you can do better than that, you forgot to mention he’s BFF with the terrorists.
To Markus Clueless –Thank you! As a matter of fact, Barak’s “mentor” in Hawaii and Chicago was/is a well-known terrorist supporter. Barak moved to Chicago following his advice.
From your response, it is likely that you are either blind/deaf or incredibly misinformed: either way, you should take you head out of your rectum from time to time, you know, for some fresh air…
This isn’t a case of the government trying to mandate competition, this is a case of trying to mandate that a company fails and gets bought out by Microsoft. If the government is telling Yahoo they can’t make a good profit, they are going to fail, to allow Microsoft to buy it out. The government, for some reason, is trying to mandate Microsoft must do well and compete with Google. I’m not sure why anyone outside of Microsoft would want this not to happen. Microsoft is going to be competing with Google no matter what. If Google gets more expensive and less profitable for those using their serach technology, then Microsoft will get what they want and have a big opportunity to steal a chunk of Google’s marketshare by providing a better return for those using their service. Advertisers want to pay less, if Google starts price fixing, they will go to Microsoft. Just right now, Google provides the best ROI for advertising.
Consumers, investors and our national economy benefit from a rule-based free market system. Darn right, it’s the government’s job to ensure the success of that system. One of the most dangerous threats to the free market system is monopoly. IF the GOOG-Y! tie up means a monopoly, the government MUST step in and protect a competitive market.
Way too many people confuse our free enterprise system with an anything-goes jungle economy.
“Build a better mousetrap and the world will beat a path to your door”
Of course then the government is expected to come in and take the better mousetrap away from you and give it to all the other mousetrap companies to level the playing field. Yahoo has lost the search engine competition. Not because Google did anything to stifle competition, but because they built a better mousetrap. So be it.
There are lots of other opportunities for Yahoo or anyone else to play in the advertising revenue marketplace both now and certainly in the Web 2.0 / Web 3.0 future. They will either diversify and innovate and succeed, or they will stick with their 2-3% of the search market and expect the government to protect them while they spiral through a series of buyouts by increasingly irrelevant companies leading to “Corel Yahoo!” or “Yaol!” just before they turn out the lights and lock the door behind them.
I was so close to buying YHOO on Ameritrade the other day. I think I had a divine intervention or something that stopped me. Oh wait, it was the thought that Mike Arrington wasn’t done with them yet. I bought RHT instead at $14.95. I’m only $0.30 down instead of $2.
So where are you going bottom YHOO at Mike? I’d say stop bombarding them at $8, to give them a fighting chance of recovery. I’m buying at $8. That’s all it’s worth if this deal falls through.
RHT’s SLA customers are practically slaves, so I consider them outstanding. But never take my advice. Do research on your own.
Like it or not, the Microsoft deal was the best option to deliver some much needed competition in the search market.
I disagree. If Yahoo’s going to go under let it. Just like the banks.
Maybe the days of Yahoo are finally over. Let the market regulate itself.
The people who work there are smart, they’ll find new jobs. The investors will take their losses and invest in something else.
That should read “Same as was Jobs and Woz were with IBM.”
Steve Ba11mer was right too. Google is and was a house of cards to an extent.
The instant 2 new kids in a garage have what it takes, they’ll have some competition. Same was Jobs and Woz were with IBM.
Yang has to go! The Google / Yahoo deal is a train wreak for Yahoo investors. There is no way Yahoo can survive /compete if it they out source their core competency.
I think the government could help out the industry by offering a type of X prize for new search engine R&D, like a million dollar prize.
That way college kids would have a real reason to innovate. College kids will chase after the money.
This has nothing to do with Yahoo, but I thought I would mention it.
Yahoo is very cumbersome to Google
http://oetztal.startkabel.nl/
http://kaltenbach.startkabel.nl/
This is good, I think we’re all educated enough to know competition is good. Yahoo should keep fighting or look for other partnerships. Can someone educate me as to why they’re having so much problems with creating a quality search product?
It isn’t the firm’s focus.
Michael, I have a question. What about the set of ad search patents Yahoo holds that other search engine competitors license?
Was that part of the buy out deal that Microsoft was attempting to finalize with Yahoo?
My thinking is its not just the increase in Google ads but the making the underlying ad search display patent somewhat worthless as far as the company holding the patent, ie Yahoo.
I have not seen any coverage of the patents role or whether the patent has a role in what is happening with this deal. For some reason since all players are paying the Yahoo license fee for that patent it seem somewhat strange omission.
Than again if the patent has no direct role than maybe that is why it was not mentioned.
in Ukraine nobody use yahoo=)
like someone said yahoo needs new people to run it, and it’s no good for yahoo, just my point of view
“just my point of view” ?????? What is your ‘point of view’, Ukraine?
>Anthony
that yahoo needs fresh blood, new people to run the company
At best the issue will be solved from market forces - like Google stepping back and Yahoo! re-engaging another media player.
Since when can Congress recognize a bad deal?
Will the Google deal be kicking full steam or will they be stuck in purgatory? Or none of the above? Would love for you to dust of that nostradomus hat
it is sad that yahoo doesn’t look at reality of making business with Google and not see discrimination of the world, money and not humany just dark nazi stalking.
So did steve ballmer finally get to senator Kohl?
So did Ballmer finally get to senator Kohl ?
Google should be broken up in two companies. Search and Apps on the one hand, Ads on the other hand. The Ads business would then become an independent online advertising clearing house, without its power being abused by Google.
eBay has a monopoly on online auctions and the world didn’t come to an end. Ditto if Google ends up with a monopoly on search advertising. The technology world is just too dynamic for that to last for long.
/Ira
The instant 2 new kids in a garage have what it takes, they’ll have some competition. Same was Jobs and Woz were with IBM.
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