Sue Decker Makes the Yahoogle Case and (Finally) Gets It Right

This week, it will be Yahoo stepping up the volume in the debate over the controversial Yahoo-Google advertising outsourcing deal.

And it could not come a minute too soon.

Yahoo has been unusually quiet about the issue, after weeks of Google’s more aggressive and listen-to-us-big-brains approach (along with some creative fake-blurbing of BoomTown!).

That’s all resulted in more Justice Department scrutiny and more critics piling on, including the typically dulcet Canadians, who might also be launching an antitrust investigation.

Thank goodness, then, that the first foray by Yahoo President Sue Decker (pictured here) makes the case in a much more sensible and straightforward manner, which has been sorely needed on the Yahoogle side.

In her piece on Yahoo’s corporate blog–the inexplicably named Yodel Anecdotal–called “Myth-busting and the Yahoo!-Google Agreement,” Decker’s just-the-facts-ma’am approach is well done.

Writes Decker:

“Here’s the bottom line:

Yahoo! will use this agreement to help us become a stronger competitor in all aspects of online advertising; and Yahoo! is not exiting the sponsored search business. We plan to remain a strong player in sponsored search.”

That said, Decker does take aim at a lot of paper tigers and makes some assertions about the strength of Yahoo’s search business that stats belie.

I have been pretty clear, as have many, that the pair will not fix prices; nor are they merging their businesses in some fashion to create a search behemoth that controls more than 80 percent of the market.

In addition, Decker’s assertion that Yahoo did not do an exclusive deal to avoid the monopoly issue is kind of moot–never ever would the pair have been allowed to strike such an agreement.

Nonetheless, even in this looser partnership, there is reason to be worried.

Most people’s problem, actually, is over whether the No. 1 and No. 2 players in any market should be allowed to partner at all.

And what most are nervous about is what happens if Yahoo (YHOO) becomes too dependent on Google (GOOG) as its search market share declines (and it is declining, to be sure, according to all stats on the subject).

Nonetheless, it is hard not to like Decker’s examples of how Yahoo cannot fill up all search page results with ads, such as a search about the “elevation of Mount Elbert.” (That lovely highest peak in the Rocky Mountains is pictured at left.)

Decker also does not spend a lot of time playing victim to the mean lobbying of Microsoft (MSFT). While she does mention it, she does not dwell on it, as Google has.

And, surprising to me, Decker does clearly admit that Yahoo is doing this deal because advertisers pay more for Google queries than for those on Yahoo.

With some enthusiasm, she also tries to make the case that Yahoo is attempting to change that.

Writes Decker:

“We will implement the agreement in a way that respects an important principle you may know as the Hippocratic Oath: ‘first, do no harm.’ That is, we will not use Google ads in a manner that would create a significant risk to the health of our own sponsored search business.

“It’s important for us to recognize when using Google ads is beneficial for users and advertisers. Queries for which we have no coverage, low depth, and/or low relative monetization are all circumstances in which backfilling probably makes sense–they indicate that Yahoo! is not currently delivering enough value for that inventory. If Google can deliver that value where we currently don’t, then everyone wins–including the advertiser and the consumer.”

I like the idea of backfilling, even if I don’t like the fact that it is the too-powerful Google that is doing this heavy lifting for Yahoo.

But, at the very least, Decker is being honest that Yahoo has come up short and needs help, as it tries to right itself.

Admitting you have a problem, of course, is the first step to recovery. So, let’s hope the cure Yahoo is using–better and more search ads from Google–does not kill it.

Here’s Decker’s whole post on the Yahoogle deal:

Myth-busting and the Yahoo!-Google Agreement

Posted September 26th, 2008 at 12:23 pm by Sue Decker, President

There’s been a lot of speculation swirling around about the Yahoo!-Google agreement. We hear everything from the claim that Yahoo! and Google will be fixing prices to the prediction that the agreement is a death sentence for Yahoo!’s sponsored search business. Since the critics clearly don’t understand the deal and what it means for Yahoo!, Google, advertisers, and users, it’s time for some myth-busting.

Here’s the bottom line:

Yahoo! will use this agreement to help us become a stronger competitor in all aspects of online advertising; and

Yahoo! is not exiting the sponsored search business. We plan to remain a strong player in sponsored search.

What is the agreement?

You may have heard that the agreement gives Google control over 90% of search advertising. That’s just plain wrong. It’s simply a contract that gives Yahoo! the right, but no obligation, to show Google AdSense ads on Yahoo!’s own network. It’s important to note that the agreement is non-exclusive and gives us the option to “backfill” with Google ads if and when we see fit. The reason we structured the deal this way–rather than a more typical exclusive deal with revenue commitments to us and traffic commitments to Google–was precisely to avoid the issues the critics are raising.

Since Yahoo! bought Overture three years ago, we’ve run that business as a closed system. For example, if you want to put a sponsored search ad on a Yahoo! search results page (“SRP”), you have to buy the ad from us. Right now, that’s the only way to access the millions of online customers who visit the Yahoo! network at the key moment when they express their interests by making a search query. Given the size of our user base and the extraordinary diversity of searches they generate, we cannot, by ourselves, provide relevant paid search ads for every search–we can’t “fill up” all of our SRPs.

In fact, no one company can fill them up–not even Google. Yes, you read that right. There are millions of unique queries, like “elevation of Mount Elbert” and many of them are never matched to a relevant sponsored search ad. These “uncovered” queries are missed opportunities for advertisers to directly engage with consumers and for consumers to benefit from relevant offers. Fortunately, Yahoo! has strong “coverage” and “depth” for many queries–meaning we have a good number of ads to display for many searches. However, coverage and depth are not equal for all categories in our marketplaces. One of our key goals is to unlock the huge value of the hundreds of thousands of less popular queries that don’t show ads Yahoo! today.

The “monetization gap” between Google and Yahoo! is in reality a value gap. Where Google is getting higher bids than Yahoo! today, this is because advertisers perceive that Google is delivering more value–more targeted leads, more clicks, and more conversions. That’s why an advertiser might be willing to bid more for a click on Google than for a click on Yahoo!–the belief that the advertiser will get more value from Google. Google is not setting prices. Advertisers determine how to value keywords. Yahoo! is committed to providing advertisers with greater value and consumers with more relevant offers and this agreement helps us meet this challenge more quickly.

Increasing advertiser value is a complicated endeavor. Part of it is technological–for example, building better matching algorithms. Part of it is giving advertisers more control over their advertising campaigns. But we also want to increase revenue by building query share, which takes time.

In the past year, we have thought about these challenges very carefully and we created a strategy that we’re convinced is a “win win” for Yahoo! and advertisers. The core idea is limited use of Google ads to deliver more value from our SRPs and other inventory in circumstances where we aren’t delivering the best advertiser value today, and then to use resources gained by that strategy to accelerate our investments in the technologies and marketplaces of the future. That’s where the agreement comes in–it allows us to provide better, more valuable connections immediately.

Current thoughts on implementation

We will implement the agreement in a way that respects an important principle you may know as the Hippocratic Oath: “first, do no harm.” That is, we will not use Google ads in a manner that would create a significant risk to the health of our own sponsored search business.

It’s important for us to recognize when using Google ads is beneficial for users and advertisers. Queries for which we have no coverage, low depth, and/or low relative monetization are all circumstances in which backfilling probably makes sense–they indicate that Yahoo! is not currently delivering enough value for that inventory. If Google can deliver that value where we currently don’t, then everyone wins–including the advertiser and the consumer.

It’s equally important for us to protect the long-term health of our marketplaces. As we studied this issue, we became acutely aware that our value proposition depends on having an active, “liquid” marketplace of search terms. The good news? Yahoo! has that for the more popular and commercial queries–the ones that produce over two-thirds of Yahoo!’s search revenues. This is often not the case, however, for less popular “tail” queries.

As we proceed, we’ll hold true to our goal of making Yahoo! a “must buy” for online advertisers. We have no intention of abandoning our key advertiser relationships. To the contrary, we are exploring ways to further strengthen those relationships, and one of the ways we will do that is through our recently announced Digital Advisory Council. We are asking industry executives from our agency and advertiser partners to join us as we explore the continued evolution of digital media and online advertising. We’re going to start by addressing the confusion and misinformation that currently exists in the market regarding Yahoo!’s agreement with Google, which is a hotly debated topic that needs some much-needed clarification.

I’ve said in the past that we’ll backfill where the monetization gap between Yahoo! and Google is the greatest. This gap is the greatest in areas in which we don’t have matches of offers with very specific queries or where our matches are narrow or not relevant. This should only enhance our relevance to consumers and bring new advertisers to our inventory that did’t do business with us or that made only limited commitments. Our overriding principle to backfill will be those win-win opportunities to backfill our inventory with advertising that clients find valuable but to which they have had scarce access and in other ways that both optimize for user experience and the maintenance of a robust marketplace.

Finally, let me be absolutely clear that we are not in any way going to be coordinating or setting search term pricing with Google. The fact is that advertisers set prices by bidding in our real time auctions. This agreement gives advertisers a new opportunity to bid for placement on an additional network that includes Yahoo! inventory. They will bid for what they think this opportunity is worth at prices that produce positive ROI. That’s how pricing works today in this industry and this agreement won’t change that.

I hope readers of this post, as well as advertisers and regulators, can move past the false rhetoric being peddled by some of our competitors and see the marvelous potential that the agreement offers the marketplace. It’s a great opportunity for Yahoo!, and we’re committed to implementing it in a way that produces the most value for advertisers and users. Ultimately, that’s the only way we can provide value for Yahoo!’s stockholders.

Sue Decker

President