Is the Google-Yahoo Deal Really a Bad Thing?

That’s what advertisers think, according to the trade group Association of National Advertisers. The ANA on Sunday filed a letter to the Justice Dept., recommending against the deal under which Yahoo will run Google ads on some of its Web pages in hopes of generating more revenue than it could with its own ads. The ANA is worried that the deal will “diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising.”

When the deal was announced, I heard the same worries from advertisers, agencies, and search marketing firms. Indeed, that concern is why the two companies voluntarily held off for a few months to let the government review the deal, even though they believe the nonexclusive commercial agreement is not legally subject to review.

But when I dug into why prices would rise, in particular, the answers didn’t quite satisfy me. Search ad prices are arrived at through an auction process, not through set prices—meaning that even if Google scoops up even more than the 75% or so of search advertising it already owns, it won’t necessarily be able to wield pricing power like classic monopolists.

Still, the concern I hear from search marketers is that prices will rise because more keywords will be competitive, since Google’s superior algorithms mean that more keywords or keyword combinations bought on Yahoo will produce clicks by potential customers, and those clicks are what advertisers pay for.

But is this competition really a bad thing, especially for consumers? Presumably, consumers are getting more relevant ads, so it’s hard to see harm there. And if they click on them, advertisers are getting more of what they want—potential customers.

It just seems like the prices will rise only if the ads are more effective; if people don’t click on them, nobody pays anything, right? I don’t like to see concentration of power any more than anyone else, and Yahoo’s deal with Google feels like something Yahoo would prefer not to do but felt pressured by shareholders to do as a way extract more value from the company after the failed Microsoft deal.

But do advertisers really have a logical case for saying Yahoo shouldn’t be allowed to do a deal to make more money on its search operation? Especially when it had a deal with Google several years ago? And spent years developing a system that apparently still doesn’t match Google in ad relevance?

I readily admit I may be missing some details here, since search ads remain more than a little murky to me. So please educate me if I’m missing something here.

Update: Nice straight-ahead summary here on MediaPost’s Daily Online Examiner. Also, a Silicon Valley guy who calls himself searchquant notes that the ANA’s Digital Marketing committee is made up of large traditional advertisers, plus three Microsoft people. Interesting post. So is this one from Terry Heaton, whose “heart bleeds for the poor, poor advertising industry.”

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