Online Advertising on the Up But Competition on its Way Down - FAST. Michael Kassan-MediaBizBlogger

Published: June 17, 2008 at 01:50 AM GMT
Last Updated: July 18, 2008 at 01:50 AM GMT

By Michael Kassan

As the great and the good of the world's advertising community gathers this week in Cannes for the famous Cannes Lions Festival there is one topic that will dominate the terraces and promenades - Yahoo's deal with Google that allows its rival to sell search ads on its site.

The importance of this partnership is underscored by the juggernaut that is online advertising. In these times of economic gloom and doom, it is the rock that we as advertisers are firmly holding onto. Worth $40 billion and growing, market-data company IDC said recently that while it expected a potential recession to curb U.S. ad spending across all media by as much as seven percent in 2008, quarterly online ad growth would still increase by around 15-20 percent in 2008.

It is in light of these phenomenal figures, we must take Yahoo's partnership with Google very seriously as its potential to threaten the health of the online marketplace cannot be underestimated.

Advertisers already swim in a small pool of online options but as details of the Yahoo-Google deal emerge (note-this is no longer a "test"), that pool is getting decidedly smaller. Claims from both sides that their partnership,"strengthens Yahoo's competitive position" (Yahoo press release)or "is good for competition" (Google blog post) are simply untrue. Yahoo has chosen a course that would start to consolidate over 90 percent of the paid search advertising market directly into the hands of their biggest competitor.

The deal is non-exclusive and Yahoo isn't required to place any ads, but let's look at the fine print here - the non-exclusivity isn't real, because Google will always be able to employ its dominant position to outbid others meaning Google always wins this auction. And while there is no requirement for Yahoo to place any number of ads, if they don't generate at least $83 million to revenue to Google every four months, Google walks away.

Under the proposed deal, Yahoo! will replace Google search ads in Yahoo! search results pages based on whether Google can charge an advertiser more for a given keyword. As such, Google and Yahoo! essentially agree not to compete with one another. Advertisers bidding for keywords on Yahoo! will have to bid on the Google ad platform (and pay the higher Google price) or be charged the Google price.

Net-net: higher prices for advertisers because Google essentially becomes the only game in town.

These apprehensions are widely reported, most recently by the Los Angeles Times Blog, advertisers have three critical concerns: world domination by Google, higher prices for search terms and decreased competition. Alana Semuels, Times staff writer, reports advertisers' heads are "spinning." (Advertiser reaction to Yahoo-Google deal: Ack!, Los Angeles Times Blog) Meanwhile, industry executives agree - Rob Norman, chief executive of media-buying firm GroupM Interaction Worldwide, said they fear that the move might lead to higher ad prices if Yahoo turns to Google for more ad inventory. (Google-Yahoo Poses Ad-Rate Worries, Wall Street Journal)

It is safe to say Yahoo! requires the initial financial boost that Google can provide, but long term, Yahoo! will be morphed into Google further encouraging Google's dominant market position. I believe the phrase is 'short term gain, long term pain'? Or perhaps 'adding fuel to the fire' is more appropriate?

We cannot take the economics of supply and demand out of the online economy - the rules should be the same on and offline, and you can be assured that this week the implications of this deal will be hotly debated. I am confident that we'll find many in our industry will reach the same conclusions as I - let's stop this now, before it's too late.

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