Business week has a long article about Yahoo’s Panama project and why it may not have the positive financial impact the company is hoping for. Yahoo’s goal for Panama is to make their pay-per-click advertising program more efficient at extracting dollars from advertisers. The details aren’t important, but the basic idea is that the highest bid on a keyword doesn’t guarantee it takes the top ad spot. A combination of highest bid and highest click through rate determines where ads are placed. That change should bump up the average cost-per-click, and have a positive effect on Yahoo’s revenue.
The article doesn’t mention Microsoft’s Adcenter product, which is a full generation beyond both Panama and Google’s existing product because it factors in demographic information about the person viewing the advertisement. While Microsoft hasn’t ramped up on advertisers yet, it’s clear that this is a three way race. An example of how much Microsoft means business is the fact that they probably bought their way into handling ads for Facebook. Without a revenue guarantee, Facebook would have gone with Google or Yahoo.
Frankly I don’t know who’s going to win the contextual advertising war over the long run. The important thing is that Yahoo has finally weaponed up, and the war is starting in earnest. Google has long hidden its revenue share details with partners, although the rumors suggest that they keep 50%ish of the gross revenue. This is way too much, and in a properly competitive market that percentage will tend towards zero as Google, Yahoo and Microsoft all compete for the same page views. Profit will need to be generated based on new product features and efficiency gains, which is the way it should be. Of course, they’ll always own their own internal page views as well, and it will be an important factor. To get the participation of the big advertisers there needs to be enough inventory to make it worth their attention. And without a robust network of advertisers the auction prices won’t go high enough. Still, all three of these companies have massive internal page views to lure these big advertisers.
So while I don’t know how much of a difference Panama will make to Yahoo’s bottom line next year, I know that the fact that they are catching up to Google is good for all of us.