Yahoo to Test Google Search Ads

Yahoo will test displaying Google search ads in a small number of its search engine queries, a move likely to be interpreted as the latest in a series of Yahoo maneuvers to resist Microsoft's acquisition attempt.

The test, expected to last up to two weeks and be limited to up to 3 percent of Yahoo search queries in the U.S., is specifically for Google's AdSense for Search service. In other words, Yahoo would be acting as one of the Web publishers that carry pay-per-click text ads from Google. The ads will appear only in

Yahoo noted that "the testing does not necessarily mean that Yahoo will join the AdSense for Search program or that any further commercial relationship with Google will result." Yahoo will not comment on the nature or timing of any potential relationship with Google.

Microsoft, whose acquisition offer was rejected by Yahoo's board in February, on Saturday said it will launch a proxy fight to attempt a hostile takeover if Yahoo doesn't agree to the acquisition in the next three weeks.

On Wednesday, Microsoft blasted the Google-Yahoo announcement, saying that a broad outsourcing deal would inevitably run into regulatory trouble because it would give Google more than 90 percent of the search advertising market.

"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo. We will assess closely all of our options," said Brad Smith, Microsoft's general counsel, in a statement.

"Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers," Smith said.

Google has a share of between 70 percent and 75 percent of U.S. search ad spending, and Yahoo has about 15 percent, said Karsten Weide, an IDC analyst. If Yahoo fully outsourced its search ads, Google would have a monopoly in this segment of the market, but such a deal wouldn't give Google a monopoly on overall ad spending, he said.

With Yahoo's search business, Google's share of the U.S. online ad spending would have been around 36 percent in 2007's fourth quarter, Weide said. This could be an argument against antitrust concerns, along with the fact that Yahoo would likely get most of the money per click, and that while Google rules search advertising, it is a minor player in other online ad segments, like display ads such as banners, he said. Still, it's clear that a search ad outsourcing deal would attract a lot of regulatory attention.

Beyond the regulatory issue, this deal wouldn't be good for Yahoo in its attempts to compete broadly against Google, he said. Yahoo should have its own search ad business, Weide said.

"The question is: Is this real? Is Yahoo seriously considering replacing [its search ad system] with Google's?" Weide said. "Or is Yahoo doing this merely to annoy Microsoft and drive Microsoft away from its acquisition attempt? It's not clear."

Eric Goldman, assistant professor at the Santa Clara University School of Law, points out that the potential outsourcing deal again brings up the often-discussed issue of how to delineate the relevant online ad market that would be impacted. Should the regulatory bodies narrow their focus to the online search ad segment, expand it to the overall online ad market, or open it up widely by considering the ad market in general, including radio, TV, print and the like?

"I'm torn about this," said Goldman, who is also director of the university's High Tech Law Institute. While Google leads in search advertising, there are plenty of opportunities for competitors to come up with a system that puts Google's dominance at risk by offering ad targeting that gives advertisers a better return on investment, he said. On the other hand, scale is also key, and Google has a massive distribution network, which it can use to trump competitors that offer better ROI results, Goldman said.

The announcement was first reported Wednesday afternoon by The Wall Street Journal, quoting anonymous sources. A broader agreement to outsource its search ads to Google could let Yahoo increase its cash flow, because Google ads generate more revenue per search, the Journal reported, referring to a consensus belief among financial analysts and Yahoo investors.

Since Feb. 1, when Microsoft made its US$44.6 billion offer, Yahoo's CEO Jerry Yang and the members of Yahoo's board have been reportedly trying to come up with an alternative deal. In addition to this Google plan, Yahoo has also held discussions with AOL, News Corp. and Disney, according to various reports in the past two months.

Should Yahoo enter into this deal with Google, it would be an acknowledgement that it has failed to attain its goals in search advertising, despite numerous efforts, including a significant upgrade of its system called Panama.

It's not clear what would happen to Yahoo's search marketing division, which runs the company's search advertising, in the event that Yahoo outsourced this business to Google. For Microsoft, it clearly wouldn't be palatable to have an agreement of this sort bundled in with its acquisition of Yahoo.

Google reiterated Yahoo's announcement, saying the deal is a limited test and doesn't necessarily mean that Yahoo will join the AdSense for Search service.