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Sizing Up a Post-Yahoo Ad Landscape

Marketing Executives See Potential New Order Under Proposed Deals

The latest developments in the Microsoft-Yahoo affair have advertising executives contemplating a drastically different landscape in the online-ad world.

"The flurry of news over the last 18 hours is the online-media industry's equivalent of nuclear war. Nothing short of a new world order in this space is up for grabs," says Tim Hanlon, executive vice president at Denuo Group, a unit of Publicis Groupe that explores new marketing technologies.

Consolidation, of course, usually reduces competition, and under some of the deal scenarios on the table, advertisers could find themselves having to work with a Google that has an ever-greater stranglehold on the online search market. But some of the potential deals-such as a Microsoft News Corp.-Yahoo combination or the proposed Yahoo-AOL agreement, which Yahoo hopes will help fend off an offer from Microsoft could wind up spreading the power rather than consolidating it.

While Google now dominates the market for paid search advertising and its potential new agreement with Yahoo would only add to that dominance-other areas of the online-ad market are up for grabs. Battles are raging over display advertising, social networking, online video and mobile, and pair-ups between Google competitors could create a few sizable players in these other fast-growing areas.

"You'd have a three-cornered hat," says Rob Norman, chief executive of GroupM Interaction Worldwide. "If you've got three major players driving to• innovate, then you'd have three pretty substantial platforms in play." GroupM is the parent company of WPP Group's media businesses and represents nearly $50 billion in global advertising spending across media-buying agencies MindShare, Mediaedge:cia, Maxus and MediaCom.

Meanwhile, Madison Avenue executives fear that a decision by Yahoo to outsource more of its search-ad sales to Google would place too much power in Google's hands and potentially drive up prices. The two companies announced Wednesday that they will conduct a two-week test, starting as early as next week, in which Yahoo lets Google handle up to 3% of its search-ad sales. Marketers say such a deal would ultimately raise the cost of doing business.

Google already has a dominant position in the online-search-ad market. It has deals to sell search advertising for a number of companies, including News Corp.'s MySpace, lAC/InterActive's Ask.com search engine and Time Warner's AOL, in which it owns a 5% stake. Google captured 71.2%, or $6 billion, of the U.S. search-advertising market in 2007, according to research firm eMarketer. Yahoo's paid-search sales came to $746 million in 2007, or 8.9% of the U.S. search-ad market.

Some Madison Avenue executives say a Yahoo-Google deal could make the market more efficient by implementing one system for the entire search marketplace, similar to what stock exchanges have done for trading equities. But other executives point out that Google's bidding system is based on algorithms that aren't completely transparent to marketers and say that advertisers would be vulnerable to the whims of that system.

Now, when advertisers buy search ads on the Web, they look at the types of consumers who use each of the different search engines and place bids accordingly. It usually works out that about 70% of the money spent by a marketer goes to Google, with the rest spread among Yahoo, Microsoft and other players. Marketers then adjust their spending among the search engines according to how each performs.

"If all of a sudden the cost-per-click prices go very high for Google and the return on investment goes down, you can instantaneously move money away from Google and into Yahoo. If you lose that option to move money into Yahoo or a Yahoo-Microsoft combination, the only option is to retreat from the search market, lower your spend, or grin and bear it" says Bryan Wiener, chief executive of 360i, a privately held agency that allocates $200 n search-advertising spending for marketers including H& General Electric's NBC Unive Office Depot.

Media buyers are also concerned about possible glitches as these companies try to integreate Meshing different technologies, sales teams and culture could ultimately slow innovation. Together, Yahoo and AOL have more than $1 billion in the past year to buy a series of ad-technology companies, each with the hope of building a one-stop shop for buying ads on the Web. Even alone, AOL has had a rock start, and its new ad-selling effort Platform-A, is just getting off the ground. Advertising executives fear such issues will be magnified by a larger deal.

"If things just get combined, but not integrated well, we'll have a real mess," says David Kenny, CEO of Digitas, the digital-marketing concerned owned by Publicis. "Ironically, it will favor the people who didn't do the deals because they will have a running start since they weren't involved."

By: Emily Steel
Wall Street Journal; April 11, 2008