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Yah Hoo for Yahoo!

Who would have thought that the most important new feature in paid search so far this year would be rolled out by Yahoo!? Yahoo's new system for managing bids on syndication partner sites is a big win for advertisers and an even bigger win for Yahoo. We're already seeing results. By segmenting traffic into Yahoo.com only campaigns on standard match and Yahoo.com + syndicates on Advanced Match, with appropriate bid differentials applied to the traffic from the partner network, we're seeing materially improved results. By improvement we mean more sales at the same efficiency, meaning higher revenue for Yahoo, in fact much higher. Let's take a look at how Yahoo poisoned its own well: {Okay, in truth, this is historically inaccurate. Yahoo bought Overture. Overture already served a wide network of sites including Yahoo.com, so there was never a time when they served ads only on Yahoo.com. I'm simplifying history to make a point: trying to grow revenue by expanding syndicate partnerships has actually reduced Yahoo's ad revenue -- at least from folks who actually pay attention to their bidding} In the beginning there were ads on Yahoo.com. The quantity of traffic was good and the quality of traffic was high. But as the SERPs became saturated with ads the growth of advertising revenue slowed. CASCADE FAILURE STEP 1: Contaminating the pool Yahoo began to expand its network of syndication partners who would serve Yahoo's ads for a price. The idea was that this greatly expanded exposure of Yahoo ads and would therefore increase advertising revenue. For the sake of simplicity we'll say the syndicate partners keep 80% of the ad spend on their site and Yahoo gets 20%. This all makes sense, but there's a problem: the quality of traffic on these syndicate partners was not as good. For smart advertisers who bid to the value of the traffic they must either advertise at lower returns on investment on higher advertising spends, or they must adjust bids to discount the poor quality traffic. CASCADE FAILURE STEP 2: Inflexibility Had they given advertisers the opportunity to bid less only on the low quality traffic, the network expansions would have been money makers, but until a few weeks ago that wasn't an option. So, advertisers had to drop bids on all the traffic, and as we'll see below, Yahoo ended up losing money as a result. Let's use the example of Acme. Initially, Acme was able to spend $5,000 a week on Yahoo and that money all went to Yahoo. Let's say they got 10,000 clicks and could afford to spend an average of $0.50/click for that high quality traffic. Now let's see what happens when Yahoo adds syndication partners who drive an additional 10,000 clicks but whose traffic value is half that of the Yahoo.com traffic. CASCADE FAILURE STEP 3: Smart Advertisers react At first blush, in this simplest model, we see that because the advertiser is forced to bid an average of 37.5 cents across both Yahoo and the syndicates to maintain efficiency, Yahoo loses money. They lose money because while the advertiser ends up spending more money and generating more sales, Yahoo now has to split revenue with the syndicates proportionally to the volume of traffic, rather than the quality of traffic. But wait! In reality, the effect is quite a bit worse than this because at an average bid of 37.5 cents, the advertiser won't generate the 10K clicks on Yahoo.com it generated with a 50 cent bid average. If we say that because of the bidding, differentials (over paying on the syndicates generates 12K clicks, under spending on Yahoo gets 8K clicks) the numbers get even worse. But wait! Getting more of the low quality traffic and less of the high quality traffic pushes down the average value, forcing bids down and shrinking revenue... and, the lower bids shrink traffic across the board... CASCADE FAILURE STEP 4: Add more syndicate partners Seeing its revenue decline, Yahoo adds more partners to make up the difference => go to Step 1 WHY SMART PRICING FAILS TO SOLVE THE PROBLEM: Through smart pricing, Yahoo applies some discount to the click fees incurred based on aggregated performance differences between the partners. This, it was hoped, would keep advertisers from dropping bids across the board. It didn't work for two main reasons:
  1. The discounts weren't even close to what they needed to be to make up for the quality differentials; and
  2. Good bidding systems don't set bids based on cost data, they base bids on the value per click, hence after the fact discounts don't make the systems think the traffic is of any higher quality. The discounts may encourage advertisers to aim a bit higher since they're mysteriously ending up more efficient than they intended due to the rebates, but that overshooting doesn't close the gap all the way.
  3. Advertisers couldn't see what the discounts were, so absent controls there was no reason to trust that everything would be okay at the end of the day.
ESCAPING THE LOOP: Providing controls By giving the advertisers the ability to control the bid differential applied to the syndication partners, the advertisers can spend more money profitably and Yahoo gets to keep the windfall. No fun for the partner network, but tough turkey. This isn't just theory, we're seeing it in practice. Early early returns suggest Yahoo may see a 15 - 30% lift in revenue from the advertisers and agencies attentive enough to take advantage of the tools. This growth will be a product of the huge percentage of traffic coming from the network partners and the huge differential in the average value of those cohorts. Now, we'd love it if we could do it by syndication partner, rather than one discount across the board, but we'll take this as a big step in the right direction. Exciting stuff from an unexpected source!
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