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Google-Yahoo Ad Test: A Gimmick To Thwart Microsoft — Or Simply Surrender?

A number of online ad industry execs expressed extreme skepticism that Yahoo (NSDQ: YHOO) is serious about pursuing a larger, more long-term outsourcing arrangement with Google on paid search. Yahoo has taken care to make this a very limited test: only U.S. searches on are involved, affiliate deals will not be affected in any way and it’s over in two weeks.

While most of the execs I spoke to believe this is merely a way to thwart Microsoft (NSDQ: MSFT), some believe that, if carried further, this kind of relationship would severely harm its relationship with advertisers across all its vehicles and ultimately undermine the enormous time, energy and money the company has spent in fashioning itself as a major seller of online ad inventory. More after the jump.

It doesn’t make sense: Here’s one possible vision, offered by Yahoo’s former VP-GM for local, Paul Levine, now VP-marketing for ad network AdBrite: Yahoo can realize 40 percent gains from outsourcing its paid search to Google (NSDQ: GOOG), and jettisoning the operation completely, saving the company millions. But then, at the end of the day, what is Yahoo? The company has already spent about a billion dollars to become an online advertising powerhouse over the past few years. And what about CEO Jerry Yang’s stated strategy about Yahoo having an integrated search and display business? Levine: “How does that core strategy fit when you’re outsourcing to Google? I’m sure Yahoo could produce more revenue using Google’s paid search system than their own. I’m sure they’re doing it to prove that there’s more value to the enterprise than is currently factored in on the Microsoft deal. But once they run the test and see that there’s more value there, what’s next? If it works really well, does that mean Yahoo will shut down its own paid search and just outsource everything to Google? I can’t imagine Yahoo going down that path.”

Yes, it does make sense: The contrarian perspective: If you look at Yahoo and Google as web publishers and not just ad servers, why shouldn’t they be able to access ad dollars on each others’ respective sites and channels, argues Frank Addante, CEO of the Rubicon Project. “Yahoo has an enormous amount of inventory that’s trying to reach advertisers from its portal. Google’s AdSense has an great number of advertisers who are trying to extend their reach.” The downside of that increased reach from an advertiser perspective is different, as it would mean that Google has more control over pricing and could drive advertisers to other ad servers, such as Microsoft. But Addante thinks that Microsoft should do a similar test with Google, allowing all three mutual benefits. Addante: “Stock brokers at different companies purchase securities from each other all the time, why shouldn’t different ad networks do the same? Microsoft has space it needs to monetize. They could do better by working together in their various publisher/ad net roles and yet still compete at the same time.”

An astonishing reversal: Bryan Wiener, CEO of interactive shop 360i, thinks that this move calls into question Yahoo’s views on its long-term future. Striking an alliance with Google on paid search would mean that Yahoo is either surrendering to its rival, admitting that it cannot cut into the search market any more than it has, or it’s willing throw away all the time, money and energy it spent to transform itself from a portal to a broader internet company – all to avoid being acquired by Microsoft. Wiener: “I don’t know whether this is just a ploy to fend off Microsoft or not. But in any case, it represents an astonishing reversal from their entire strategy around search. If they choose the Google route or the Microsoft route, either way it seems they’re sacrificing their independence.”

It’s not going to happen: Alan Pearlstein, CEO of local online ad specialist Flying Point Media, finds it very unlikely that Yahoo would pawn off half its business to a competitor and allow its relationships with advertisers to deteriorate instantly. “If Yahoo is no longer controlling the search on their own site, they become less and less meaningful to advertisers. Right now, they can offer a multiple array of services to advertisers on their sites: search, banner, their ad nets and exchanges. So if Google is handing Yahoo’s search, it dilutes the value proposition that allows them to promise the efficiencies by buying ads with Yahoo’s other properties.

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