Yahoo, We Can't Afford A Monopoly In Search Advertising Even If It Kills You

Yahoo and Google aren’t holding anything back in their effort to win our hearts minds in the search marketing war. Or rather, Yahoo’s surrender in that war as they prepare to include Google Adsense ads in their search results.

They had what amounted to a advertorial in the New York Times earlier this week. Google wrote not one but two blog posts on the matter, and launched a whole website with their side of the story. And today Yahoo President Sue Decker weighed in with a long blog post, with all the same arguments.

Microsoft, hoping to kill the deal, hasn’t been sitting quietly. They’ve got their own websites and have been lobbying the government for months to oppose the deal.

The deal allows but does not obligate Yahoo to place Google ads on their site instead of their own. Google and Yahoo stress that Yahoo is committed to keeping their own robust advertising platform to ensure long term competitiveness.

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.

There are three players in search today. In the long run the 80/20 rule is likely kick in unless a monopoly emerges. Microsoft needs to be that 20% player to keep the Internet healthy, just as AMD keeps Intel’s processor prices in check even though they don’t have much actual market share.

But if Google gets Yahoo, Microsoft won’t be able to be that counterbalance. And then Google will be free to charge monopoly prices to advertisers and share next to nothing of that revenue with publishers.

That’s why killing this deal is so important. It’s not about the share price of Google, Yahoo or Microsoft. It’s about maintaining a healthy Internet ecosystem that continues to let entrepreneurialism bloom.

My position on this has been steady since Microsoft first bid for Yahoo early this year. It’s destroyed my relationship with (the execs that remain at) Yahoo, and the chill is palpable during my few visits to Yahoo HQ these days. I can live with that, but what I don’t want to live with is an Internet where all the advertising revenue goes to one company. That sounds too much like the Windows/Office world of the 90s to me.