Yahoo execs provide more details on Google deal

By Scott M. Fulton, III | Published June 13, 2008, 2:09 PM

The headend of Yahoo's search results, come this October, will probably continue to look the way Yahoo always intended it would. It's the tail that will change, in a deal where Google has apparently been offered the tail first.

"We gain a right to use Google to backfill some of our advertising, and we have full control over that." That's the characterization Yahoo CEO Jerry Yang gave to the service Google will provide to his company, in a conference call with investment analysts early Thursday evening.

Specifically, the key element Yahoo gains from Google is a way to very selectively deploy AdSense contextual advertising to boost the revenue from segments of Yahoo's search that do not typically generate much revenue on their own. It won't substitute for Yahoo's existing search-related advertising, but it will fill those gaps. Plus, Yahoo's existing content partners will also be offered the ability to do the same for their services, though as Yahoo President Susan Decker told analysts yesterday, that offering will not be extended to future Yahoo content partners -- only current ones.

"Yahoo monetizes very competitively with Google for query ads," Decker stated at one point, referring to comparing what Yahoo reaps from search and what Google reaps from the same search, as determined by recent Yahoo tests. "But it's not as competitive in the tail, primarily because of the greater scale of the Google marketplace."

"Tail?" That's the term used to refer to the bottom end of a very long query. In a well-optimized search, those sites or pages that have the greatest relevance should float to the top. That's the most valuable part of a search page for an advertiser to be aligned with. Ad buyers see the "top 10" entries in a search results page as the part that grabs the most eyeballs.

And that may be an error on their part. See, Google has been known to be capable of gathering hundreds of valuable responses to well-phrased query criteria, and knowledgeable people -- particularly researchers and, well, journalists -- pay just as much attention to page 4 or page 7 as they do page 1. And it's those people who have a closer handle on what it is they want. So why shouldn't it be easy to target ads for them?

Maybe it is easy, but it's Google that capitalized first.

"So one of the things that's important to us is making sure that we could have control of the advertiser segments where we think we are comparable or superior in terms of performance," Decker continued. "The flexibility of this deal allows us to get the best of both worlds, and effectively optimize the best of both Google and Yahoo in a way that we think will attract and enhance advertisers. In fact, we have the flexibility to optimize every single day."

That optimization should affect, on a very granular basis, which parts of Yahoo's inventory are most valuable. Those are the parts that will probably be served most, if not completely, by Yahoo's own text ads; the remnants, if you will (a term used in advertising to mean exactly what you think it means), will be served to some degree by Google AdSense.

So how will revenue change hands? After all, if Google's serving the ads, it's Google that gets paid first, right?

Sue Decker explained: "The mechanics of the agreement are that advertisers pay Google directly for each click on Google paid search results appearing on Yahoo's owned-and-operated network [and] certain affiliate sites. Google will then pay us TAC [traffic acquisition costs] based on revenue realized from click-throughs on Google-supplied ads. Our advertisers will continue to pay Yahoo directly for clicks served through Panama [Yahoo's new search infrastructure provider, now known commercially as AMP] on Yahoo paid search, so that will not change.

"In essence, we improve our access to the paid search universe, but on terms that work for us, that leverage our strengths, and that allow us to continue to deliver exceptionally well for our advertisers and our publishers," Decker added.

Next: The mechanics and dynamics of the deal...