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Yahoo’s problems with search monetization

Good article today for search nerds: Yahoo just needs to fix one thing: Monetization.

At the end of the day, the article is saying something pretty obvious: Yahoo needs to make more money based on the traffic they have :)

CPA is not the cure-all…
The question is, how? The author claims that somehow CPA is a solution – it may help, but at the end of the day, it’s a complicated issue. Sophisticated buyers (which constitute most of the dollar volume on these marketplaces) are already pricing based on CPA, even if they are bidding on price-per-click. They take the PPC they are bidding, the conversion rate on their landing pages, and figure out the effective CPA. So if you were to switch to CPA, they might love you more, but they won’t necessarily increase their pricing.

Also, CPC is a great compromise between publisher and advertiser – it’s part of the reason why it’s a very balanced pricing model. For publishers, they prefer CPM (guaranteed revenue) without being accountable for anything, particularly conversions. For advertisers, they prefer CPA since it’s guaranteed margin for them. CPC means that both party take risks.

Even so, CPA has been around for a long time. Commission Junction, Linkshare, and all those guys have been doing the CPA affiliate model for years. Recently, new folks have emerged like Adteractive and Azoogle who arbitrage high-ticket CPA offers against all sorts of different media. See Jay Weintraub’s awesome blog for a ridiculous amount of detail on this topic.

If not CPA, then what? (I don’t know)
I won’t dare to speculate how Yahoo should improve their monetization. I know there are people much smarter than me thinking about that exact topic. My only point is that it’s not as simple as pointing to something like CPA and claiming that’s the way out.

Fundamental economic issues?
The more worrisome issue is that it may be that Google has hit some weird critical mass with advertisers and publishers that will be very hard to compete with, in the long term. When an ad network first starts out, they have a chicken-and-egg problem since they need advertisers to attract publishers, and publishers to attract advertisers. There are ways to bootstrap, but it’s a difficult proposition.

But even when an ad network gets bigger, that chicken-and-egg problem doesn’t go away. The more advertisers you have bidding, the more competitive the pricing is, per click. This means that publishers (and Yahoo) can monetize their inventory better, but it’s hard to attract more and more advertisers without growing the amount of high performance inventory.

I believe people in 1999 called this a “network effect.”

Ultimately, Google may be too far ahead. I’ve heard rumors that Google is actually paying certain publisher partners over 100% revenue share(!), just because the economics dictate that the overall keyword market benefits even if they lose money at the deal. Basically these publisher partners keep the keyword prices very high, which pays dividends throughout the marketplace. This would point to the idea that Google is being so aggressive in defending their marketplace in a very savvy way, as to not give any chance for Yahoo and MSN to breathe.

So all in all, it may not be so easy to catch up with Google as to invest in technology. eBay is a very simple concept, yet its marketplace is VERY defensible. Just look at Yahoo Japan, which got a marketplace going first before eBay, and they’ve been able to keep their lead.

One last note on this – Microsoft sorta has a trump card in all of this since theoretically, they can create a bunch of high-value search out of thin air through Vista, and that’s an option no one else has. It may be possible that with that influx of inventory, they could grow without directly engaging Yahoo and Google in the Internet attention wars.

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