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Monday, August 11, 2008

Another slick deal for Google or Yahoo or both?

In discussing Google and its sources of revenue, I have often pointed out that the company does much more than monetize search. Pointing to Google's SEC submissions, I have shown that the AdSense product provides roughly one third of Google's revenue. Given the billions of dollars Google pulls in each quarter, this is no insignificant amount.

Today, ValleyWag wrote about the deal Google has made to provide advertising for Yahoo! It was generally believed that the agreement was strictly related to search advertising. Today, the parties published their agreement. Many sections are blanked out as there are aspects of the deal that the companies do not wish to make public yet.

What is surprising is that the deal is not limited to search advertising at all. A major component seems to be AdSense. The language of the agreement discusses that AdSense ads can be deployed to Yahoo!-owned properties and such other sites as meet Google requirements.

ValleyWag makes the point that Google can learn about ad placement from Yahoo! while Yahoo! has the potential to learn more about search advertising. Maybe, maybe not. The more compelling argument is that Google now has a new and larger inventory of prime ad spaces to target with AdSense. These high-traffic properties owned by Yahoo! were, I suspect, previously unavailable to Google.

So this is clearly a good deal for Google. What does this mean for Yahoo?

Yahoo! seems to be willing to try anything to boost advertising revenues. The company is already a solid performer with respect to display ads. It is no secret that Google is pulling away from Yahoo! and everyone else in terms of search share and search-advertising revenues. Now, it seems that Yahoo! wants a piece of contextual advertising and that they feel it is better to contract it out to Google rather than develop it in-house.

Is this a bad thing on the part of Yahoo? I'm not sure that it is. I would think that Yahoo! did a make-buy determination and decided that it would be easier and cheaper to go with Google's AdSense and be almost immediately able to begin collecting the revenue stream. It is true Yahoo! will need to share that revenue with Google but it is undoubtedly a step forward for both companies.

So maybe there is hope for Yahoo! after all. The company failed to sell its search functionality to Microsoft but is doing the next best thing by bringing in Google's search-advertising technology which is the best in the industry. Adding contextual advertising via AdSense is a smart way to further monetize Yahoo! properties with minimal investment. If you're a Yahoo! investor, this should be cause for at least a little optimism.

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