It’s official: in the face of mounting legal challenges and expected regulatory hurdles, Google has called off its deal with Yahoo to deliver each other’s ads through their respective publisher’s networks. Yahoo was disappointed, and sought to explain their position in a note sent to advertisers (see the bottom of this blog post).

As I had blogged back in July, such a deal would have probably driven up advertiser costs and, presumably, publisher payouts. More importantly, as the Motley Fool argues, it would have extended a lifeline to a slowly dying Yahoo, which serves up the #2 contextual ad network, and an effective counterbalance preventing Google from shaving off too large a cut. Although the deal certainly had some antitrust concerns, having a competitive contextual ad market lose one of its biggest contenders makes it look more and more monopolistic. And monopolies can afford to squeeze clients at both ends of the advertising equation.

I’m not suggesting that “don’t be evil” Google plans on being, or even can be, a monopoly. But reduced competition, if it ends up granting the biggest players license to tweak their margins, can be detrimental to both advertisers and publishers. Fluctuating RPCs, which we’ve seen and reported on, should be primarily the result of the dynamic nature of advertiser bids and publisher inventory, not any particular ad network’s, or group of ad networks’, effort to extract more revenue.

—- text of message sent to Yahoo Search Marketing advertisers —-

—- sent Wednesday, November 5, 2008 —————————-

Dear Advertiser,

We wanted to reach out to you directly regarding Google’s decision,

announced earlier today, to terminate the advertising services

agreement that the companies announced in June. Yahoo! continues to

believe in the benefits of the agreement, and is disappointed that

Google has elected to withdraw from the agreement rather than defend

it in court. Google notified Yahoo! of its refusal to move forward

with implementation of the agreement following indication from the

Department of Justice that it would seek to block it, despite

Yahoo!’s proposed revisions to address the DOJ’s and advertisers’

concerns.

While disappointed by this turn of events, we are writing to you to

reaffirm our commitment to working together to drive your advertising

results, and to provide the continued leadership you expect. The fact

is that this deal was incremental to Yahoo!’s product roadmap and

does not change Yahoo!’s commitment to innovation and growth in

search.

As you know, Yahoo! has long focused on how to improve the user,

advertiser and publisher experience. We will continue to enable you

to easily connect with the consumers you most want to reach, by

creating a more open, efficient and effective marketplace for

advertisers and publishers. We also plan to continue to provide the

cutting-edge advances in products, platforms and services that the

industry needs and expects, by leading the way in helping advertisers

navigate the converging contextual and search ad markets. Finally, we

remain committed to innovation in anticipating the needs of Yahoo!’s

audiences–one of the largest and most engaged populations of

consumers on the web–by creating the unique context that delivers

results for brand advertisers online.

In short, even in the absence of a commercial agreement with Google,

we intend to become an ever-stronger player in online advertising. Our

certainty on this front comes from the progress we continue to

make in many areas, not the least of which are the significant

innovations we’re making in search. We continually optimize our

algorithmic and sponsored search. In fact, in 2008 alone, we have

developed and launched hundreds of improvements to our search engine,

including index expansions and updates, ranking models and

performance tuning. Each of these features is designed to improve

search quality and deliver a more relevant search experience to our

users.

Particularly in this economic climate, identifying and making rich

and deep connections with your target audience is of the utmost

importance. No company is better prepared to help you succeed in that

quest than Yahoo!. In addition to being the largest aggregate

publisher in the U.S., we are #1 or #2 across virtually every key

category, including being #1 in the categories of News, Sports,

Finance and Entertainment, and we’re putting our leadership to work

for you every day.

By offering extensive reach to consumers, breakthrough advances in

technology, simplifying inefficiencies in the advertising process,

putting new and industry-recognized talent in place, and providing

tailored solutions across our network to meet your needs, we are well

prepared to provide you with the most significant return on your

investment.

We are looking forward to continuing to work with you in building

your business. Please don’t hesitate to reach out to me or anyone on

our team with your questions, or to discuss your challenges. We’re

open to a productive dialogue with you in the service of continuing

our successful work together.

Warmest Regards,

Hilary Schneider

Executive Vice President, Yahoo! U.S.

This entry was posted on Thursday, November 6th, 2008 at 2:14 pm and is filed under Online Advertising. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.