Yahoo/Google Ad Deal and Matching Markets
Yahoo recently announced a new advertising partnership with Google at the same time as it announced lagging third quarter profits. The deal states that Yahoo will be able to display ads from Google’s advertisers on its own search result pages and will receive a percentage of the revenue generated by clicks on these ads. Additionally, Yahoo will pay Google a fee per query in order to use its results for image and other web content searches.
I found this announcement interesting to consider in the context of matching markets for advertisements on web searches. Prior to this deal, Yahoo had an exclusive partnership with Microsoft to provide search ads, but it seems that these ad slots were not valued highly enough among advertisers to generate the type of revenue Yahoo expected. This is probably due to a low clickthrough rate for those ads that are displayed: each advertiser’s valuation of a single click on a specific ad based on a specific query does not change based on the slot, only the clickthrough rate changes. It seems by using some of Google’s search results Yahoo is hoping to increase the clickthrough rates of its advertisements in order to generate greater profits, either by displaying a greater variety ads to users or by increasing traffic on its search engine in general.
Another aspect of this deal to consider is where Google stands to gain. Google is already securing advertisers and crawling the web for its own search results whether or not Yahoo uses some of these results. Additional exposure of some ads from which Google receives a slightly lower portion of revenue per click (due to sharing a percentage with Yahoo) nonetheless earns Google a profit. And in fact, the greater exposure will probably lead to an increased clickthrough rate and therefore increased advertiser valuation of advertising slots with Google. It will also take some space from competitor Microsoft, with which Yahoo still holds a separate but no longer exclusive ad deal. This could lead to a lower clickthrough rate for some Microsoft ads and therefore lower advertiser valuation of Microsoft ad space.
I found this story interesting because it shows how market matching may explain companies’ interactions as they compete for higher clickthrough rates and therefore the ability to charge higher prices. When Yahoo had an exclusive ad partnership with Microsoft, it was not taking in the kind of revenue it hoped to see. For this new deal to benefit Yahoo, advertiser valuation of Google ad space in at least some cases must be higher than valuation of Microsoft ad space. It will be interesting to see the effects of this deal on the companies involved.
http://www.reuters.com/article/2015/10/20/us-yahoo-results-idUSKCN0SE2P120151020
http://www.businessinsider.com/yahoo-just-signed-a-deal-with-google-to-provide-search-ads-2015-10