So, there’s good news and bad news from the Yahoo camp for Microsoft.

The good news is that Yahoo is definitely open to the idea of a buyout.

The bad news is that it’s gonna cost Microsoft much more than they originally anticipated.

Yahoo responded to Microsoft’s buyout bid by reiterating that the $44.6 billion offer undervalued the search engine and online mega-portal. Despite the fact that Yahoo share prices have recently dipped to well below the offered price of $31/share, Yahoo is confident that they can get more out of a potential buyer. Other names that have been discussed as interested in Yahoo include News Corp. and Time Warner Inc.

Personally, I’m not sure how I feel about the idea of Yahoo becoming the property of Microsoft. The effects on paid search would be difficult to predict. Many remember that Yahoo and Microsoft shared Overture as a paid search provider years ago and, since Microsoft broke away from Yahoo in mid-2006, the companies have moved in different directions in terms of the quality of their search products.

Although Google’s AdWords product is unmatched in terms of usability and efficiency, I think that it would be fair to say that Yahoo, especially since its move in 2007 to the “Panama” platform, has made significant strides to improve. Whereas Overture and Yahoo Search Marketing in its infancy were very difficult to use and were often easily ignored by users who frequently dedicated their entire search budget to Google, nowadays, we find that Yahoo is, at the very least, an excellent supplement to an active Google AdWords account and, in some cases, a flat-out better provider of quality traffic.

Microsoft’s MSN adCenter product, on the other hand, continues to baffle users and agencies alike. With an inefficient user interface, an inability to opt out of unpredictable traffic drivers such as a-list, and a still developing support staff, Microsoft has, in many ways, regressed even from the days of Overture. Who’s to say that Microsoft, despite its war chest of funding, wouldn’t simply degrade the quality of Yahoo’s product in the event of a takeover, leaving Google without any real competition? It’s a frightening possibility.

It’s unclear whether Microsoft will balk at Yahoo’s demand for a better offer or whether this was an expected move from the opposition in what will inevitably be a buyout. For search marketers, though, I feel that there is some cause for optimism in either scenario. If Microsoft does balk and Yahoo remains independent, I feel that it really puts the pressure on Yahoo to continue to invest in their search marketing product in an effort to narrow the usability gap between Google AdWords and itself. In the event of a takeover, I would hope that Microsoft would be more likely to integrate with Yahoo’s current model or upgrade their current system to include some of the improvements that Yahoo’s system offers. Microsoft is many things, but it is not a stupid company; we could potentially end up with a product superior to the current Yahoo and MSN products that integrates both engines.

The ball is back in Microsoft’s court. Unless they are ready to pony up more cash, Yahosoft remains purely fictitious.

**Update: There was an interesting BusinessWeek article backing Yahoo’s play of holding out.  Check it out.

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Last week, the Account Development department welcomed its newest member, Amir Shoucri. Not surprisingly, Amir’s fresh perspective introduced a compelling blog topic…He wrote:

With all the immunity granted to the ignorant new guy, I’m going to throw this out there – I never clicked on an Internet ad before working here. I realize I’m walking a fine line, and at the risk of subverting what we do, I’ll be upfront about it. Like many people, I associated search-engine advertising with a variety of other negatives – spam, pop-ups, spyware, viruses etc. What’s more, I considered myself sophisticated enough to avoid all the traps set to ensnare the casual web browser. I use search engines; they don’t use me, kind of thing.

That having been said, I will admit to some misapprehensions. I don’t think I understood what a Google ad was until recently. The most I ever thought about it was the time I was discussing my private life in an e-mail and suddenly noticed I was being offered a variety of mental health services. Having now attained some background, I’m fairly impressed with the standards Google maintains for ad style, content, and security.

Web advertising is a pervasive new industry. I’ve worked in other pervasive industries, and all of them felt underappreciated. In television, it was always about the Nielsen ratings (Q: How come no one is watching our show? A: Because, Donnie Wahlberg is in it). In the education field, it was similar (Q: Why does no one value us? A: Because, knowledge makes people unhappy). Determining cause and effect was a game of constant guesswork.

With online ads, however, it seems the proof is in the pudding. If someone clicks on an ad, navigates to a site, and makes a purchase, that to me is literal, definitive evidence that advertising works. This is not the gray area of traditional advertising or sociological academia; the ability to assess is tangible and simple. People, despite what I would have guessed, are clearly clicking on ads.

I get the sense that I’m not alone in my initial misconception of this industry. What impression do most people really have?

After putting some thought to the issues raised by Amir, I wrote this response. Several points probably deserve a lot more attention (see future blog posts) but there’s plenty of food for thought:

Before I joined the Wpromote team, I could have counted on one hand the number of times I clicked on Google and Yahoo ads. Sure, I used the search engines extensively when I was curious about something, or working on a research paper. Google was my homepage for at least two of my four years in college (AltaVista was probably my homepage for the first couple years, if you can cast your memory back that far…) and Yahoo was never far from my address bar, but my cursor never strayed from those organic results.

To this day, every time I talk to someone about what I do at Wpromote, the conversation inevitably turns to organic search. I couldn’t tell you how many times I’ve heard someone say “Well, I hardly ever pay attention to the advertisements on (preferred search engine). Can you help raise my position in the search results?” Well, as a matter of fact, we have an entire department devoted to that: Search Engine Optimization (SEO). It will cost you more money and take far more time, but we can help move your site into the elusive and coveted Top Ten.

So then what? Let’s say you have a site that sells hand saws, and we get your site into the Top Ten for keyword searches of “hand saw.” Well, now you’re wedged somewhere between image results, a Wikipedia entry (see future blog entry), an article on “How to Choose the Right Handsaw”, and a few manufacturers websites with far more awareness and visibility. What have we accomplished? A spot in the Top Ten, and little (if any) additional traffic.

Internet advertising continues to struggle with its longstanding reputation for poor user experience. Anyone who’s ever been on a computer has probably dealt with pervasive and intrusive pop up ads. Many have had a computer infected with Spyware and other privacy-invasive software, which sometimes host viruses that render computers virtually worthless. User distrust of online advertising is understandable, if a bit misguided. As the saying goes: “Fool me once, shame on you. Fool me twice, shame on me.” Unfortunately, many internet users categorically ignore or dismiss all forms of advertising they see online.

Still, I don’t hear anyone suggesting online advertising is overvalued. When News Corp acquired MySpace for $580 million in 2005, you could hear jaws hitting keyboards worldwide. Now analysts are suggesting the site would be worth $15 billion in today’s market! Elsewhere, advertising megafirms are producing million dollar “Viral Videos” for clients to flood the web and rack up view counts on YouTube, all in the hope that they will translate to increased sales. Some of these videos don’t even feature the client’s name, logo, or slogan, but hope the subject on screen will subconsciously register with viewers. The traditionally held concepts of brand identity and recognition in the advertising industry are being shaken to their foundations as the World Wide Web continually repositions and reinvents itself.

Right. So we’ve got subliminally encoded videos and privacy-invasive software logging our every move online to figure out the way we think. Is that what people want? Seems to me that anytime an ad pops up in my face, even if (read: especially if) it’s advertising a product I want, it will only evoke Orwellian fears in my mind. People don’t want to be spied or preyed upon; but, when they want something, they want it as quickly and conveniently as possible. Which brings them right back to where we started: their trusted search engine.

Having said all this, the fundamental issue still remains: the Google and Yahoo advertising departments could stand to hire their own PR reps. Should they advertise their own advertising? How can they regain the trust of internet users who clearly want the advertised products, but fear the links will implant some sort of tracking software on their hard drives? For one thing, they can continue to offer the user-friendly advertising they’ve become known for. The cream always rises to the top. More and more people will eventually catch on to what’s happening on the right hand side of their search results pages. It certainly helps when online businesses have well built, highly targeted, and closely managed ad campaigns. I, for one, have come to discover that I’m actually more likely to find what I’m looking for under the sponsored links.

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Despite its very public financial problems, Yahoo has made the bold decision to reject Microsoft’s initial bid to takeover the struggling company for 44.6 billion, or $31 per share, according to The New York Times. Sources say Yahoo’s official response will be delivered on Monday, February 11th, ten days after Microsoft made its offer.

Yahoo’s board of directors met on Friday, February 8th to discuss the bid but a clear strategy for moving forward has yet to emerge. However, Yahoo executives feel the company is worth more than 44.6 billion, and remaining independent is still a potentially viable strategy. Likewise, working with Google is still a possibility. Yahoo executives are also considering the antitrust challenges it would likely face in either scenario.  According to NPR, a merger with Microsoft would give the new entity an estimated 30% of the market share in search.

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Likely you have heard about Microsoft’s bid for Yahoo by now…

It was announced on Friday, February 1st to a slew of commentary.

While I lack any new insight on the pending merger, I do find this hilarious.

Is Google really suggesting that a Microsoft/Yahoo merger would compromise the open nature of the Internet? I agree that Microsoft screwed the PC market. I’m both a MAC and PC user and I am currently looking to purchase a new home PC. It is frustrating to be forced to choose between buying a newer model PC installed with Microsoft’s new and bug-laden Windows Vista OS or paying more for an older model PC installed with the time-tested Windows XP. It is my opinion that an unfair abuse of power underlies Microsoft’s sales strategy. That being said, with Google’s domination of search and its increasing influence over the all things Internet, I find it ironic that Google would say Microsoft is challenging the openness of the web.

There may be more to Google’s interjection than meets the eye, however, as the New York Times reported today. And as consumer and someone who works online, I would prefer that Yahoo remain an independent entity. I wouldn’t even mind if Google helped raise the funding to make an independent Yahoo possible, and whether or not that would benefit Google is less of a concern to me than what might happen if Microsoft and Yahoo merge. Yes, I think it’s ironic for Google to call out Microsoft on its history of antitrust troubles, but in the end, if it came down to choosing between Microsoft/Yahoo and an independent Yahoo by way of Google, I would choose the latter. Then I would go buy a PC. Go figure.

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On the heels of Mike Block’s post about Ask.com and their 3% market share, comScore Inc’s new study estimates Google’s market share has grown to 60% worldwide and 50% in the United States.

“According to comScore’s qSearch 2.0 service, more than 37 billion searches worldwide went through Google in August. That’s about 60 percent of all searches, higher than Google’s 50 percent in the United States.”

Google however, is not number one everywhere. In China, Baidu.com remains the dominant search engine and their share in the Asian market is enough to rank them in the Global top 5, according to comScore Inc.’s inaugural report on worldwide search patterns.

Clearly the biggest room for market growth for both Google and Yahoo is in China. While Google clearly dominates Yahoo in the US and Europe, Yahoo recently added to their internal push of growing their reach in China by announcing that they will buy 10% of the shares in the initial public offering of Alibaba.com. AliBaba.com is the business-to-business unit of China’s biggest online retailer. Yahoo already owns a 40% stake in Alibaba.com Corp.

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Last week Nielsen/Netratings released the August 2007 results on the top 10 search providers in the United States.

Not surprisingly, Google continues to reign supreme, taking home 53.6% of searches and recording a 39.8% year-over-year growth in total searches. According to Nielsen, they recorded nearly 4.2 billion searches — in August alone. That amounts to nearly 50 billion searches a year, a number which is simply impossible to fathom. That averages out to over 166 searches in Google annually for every adult, child, and baby in the United States.

Following not even close to the heels of Google was Yahoo, tallying a 19.9% share of searches.

The biggest gainer in the bunch was MSN, which recorded over a billion searches in August, and had 69.8% year over year growth. They came in third with a 12.9% share of searches.  I can only assume that this massive jump is due to the release of the Windows Vista OS, which come loaded with MSN search as the default search preference for users.

Looking at these numbers, it is hard to fathom anybody truly challenging Google’s lead. There are still plenty of ways that Google can trip up, from the recent privacy concerns to simply the law of large numbers preventing Google from continuing such absurd growth (though this still does not diminish their market share, just potentially their sky-high stock price).

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Intuitively and simply designed products and interfaces are the “end all, be all” in business. Businesses live and die based on this functionality.

In this regard, Yahoo! has seemingly missed the boat on their sponsored search advertising interface. The interface that Yahoo! employs isn’t “awful” by any means, but it does seem to lack intuitive design. The consistently top performing products and companies are always those that look at their customers and try to imagine their quintessential needs and wants. They are able to synthesize this with powerful features, yielding a stellar good. Perfect examples of this would be Google AdWords and Apple’s iPod. Both products perform exceptionally with customers because they offer so much flexibility and such ease of use, while mitigating much of the technical jargon and difficult procedures that their competitors sometimes incorporate.

Regarding Yahoo!’s oversights, we must first turn to their bidding system. In Yahoo!, when you reach the portion of the sponsored advertising campaign creation process that has to do with setting keyword bids, you are prompted with a graph that attempts to detail an estimated amount of clicks, impressions and so on. Yahoo! also suggests a generally too-high starting bid amount. In order to correct the bid, it requires that you change the bid amount and hit an “update” button, otherwise your new price settings are not applied.

Perhaps Yahoo! was trying to take the guesswork out of bidding and trying to help novice advertisers achieve better visibility. If so, I disagree with the approach. Where monetary aspects are being introduced, it is best to err on the side of saving money rather than improving visibility. Google, for example, doesn’t suggest an initial price; it lets you put in an amount you think would be reasonable for keyword bids and then gives you the option of seeing if those prices are “high enough” to get activity. Bid first, then show the graph; it’s simple, accurate and effective, without seemingly trying to extract additional money from the user.

Another function of Yahoo!’s interface that lacks intuition is their system of labeling disapproved ads and/or keywords. Whereas if you were to ever enter a Google adgroup, and see that your ad was disapproved for some reason, you would get this nifty little link right under the ad saying, “Disapproval Reason” which, when clicked on, drops down another small window explaining the reason. Easy to find, easy to use, easy to understand. Turning to Yahoo!, we see a completely different take on trying to “help” customers fix problems with their advertising. Upon entering a problematic adgroup in Yahoo!, you might be able to find problem warranting icons that are easy enough to spot, but not very easy to figure out. In a very round-about manner, a user is forced to access an editorial review portion of the interface, and then forced to run a mini report in order to finally find an explanation for why Yahoo! disapproved of something. Once again, in trying to assist the user, Yahoo! ends up making a seemingly simple function more difficult to execute.

Despite the full blown Internet Age that we are in, there is still a need to design and implement products that don’t take a lot of brain power to understand and use. Intuitive design is not only a pleasure to work with, it also saves time for the user, which makes the user more likely to continue to work with and even invest more heavily in the system. Yahoo!’s efforts at improving design should be commended, however, greater emphasis should be placed on the real-world interaction with the system so that simple kinks and pratfalls are avoided before the final version is foisted upon the clients.

Yahoo’s January redesign was certainly an improvement over the old system, however, there are still many improvements that could be made to improve the user experience. Yahoo! has shown the desire to improve their interface; I just hope that they can match their desire with results that will help them close the “intuition gap” with Google.

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As reported today, Yahoo! continued the recent frenzy of acquisitions by purchasing Zimbra, a popular maker of an email and calendar suite, for a cool $350 million in cash. This seems to be capping off a flurry of activity by interim Yahoo! CEO Jerry Yang who took over after the departure of Terry Semel.

This is a very, very smart acquisition in my opinion. Yahoo! currently is heavily invested in the e-mail space, with the Yahoo! mail system counting over 250 million users worldwide. I imagine the purchase will allow Yahoo! to leverage much of Zimbra’s excellent email, calendar and collaboration technology, already popular among it’s educational and corporate clients.

This purchase is setting up what will turn out to be a bloody battle of the desktop and the home page:

• Google’s much-loved Gmail faces off with both Yahoo’s much-improved new web-email offering and Microsoft’s Hotmail product. As the web-based email reaches new levels of usability, Microsoft Outlook, the king of corporate email, suddenly doesn’t look so invincible.
• Google Apps is a direct shot at Microsoft Office, and Zimbra’s collaboration and calendar tools look to be heading the same direction.
• Google’s domination of the search market hardly looks in doubt, but Yahoo! and MSN are throwing major resources towards winning back the almighty advertising dollar, with purchases of aQuantive and Right Media just a few months ago.

One of the biggest questions will be whether or not web-based software such as Google Apps, Yahoo! Mail and Gmail, can become functionally capable enough to actually start taking market share from Microsoft Office. They have come a long way to be sure, but as cool as I think Google Apps is, and as much as I hate shelling out for dozens of copies of Office each year it seems, there is no way in the foreseeable future that even an open-minded, web-loving company like Wpromote will take that plunge.

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In traditional media, you might place radio ads, billboard ads, print ads and do promotional events. At the end of the day, at best you track the increase in sales and claim it all was a success. Maybe the billboards were worthless, maybe the promotions were driving all of the increase. Maybe you test removing each one to over time find out what works. More likely, you pat yourself on the back for the sales increase and continue with all of the advertising.

This is the dilemma that drove retailing pioneer John Wanamaker to famously quip “I know that half of my advertising dollars are wasted … I just don’t know which half.”

Enter search engine marketing promising that enigmatic trait in advertising: accountability. Suddenly we were able to promise advertisers the unique ability (the closest in traditional media would be direct marketing) to track every dollar that was spent and exactly what it generated in revenue. While this proved to be a major factor in the meteoric growth of search engine marketing, it was a double-edged sword. Suddenly, search marketers were held to a higher standard of accountability than traditional advertising.

To a certain extent this is just fine, and the results spoke for themselves. However, as the market has become more competitive and advertisers more sophisticated, we needed to identify those benefits that search marketing brings that are not tracked directly to online sales. The first step was tying in phone call tracking to our search marketing efforts, so we can show exactly the number of calls in addition to leads or sales that were generated in a specified period of time. Basically, a unique phone number shows up on the client’s website if they came from an ad that we generated, and we track all of these calls.

Beyond online sales, leads and the phone calls, things get a little more vague. Specifically, there was the belief that the search engine marketing we were doing were impacting off-line — and therefore un-trackable — sales. But with little ability to provide these numbers, we are forced to rely on overall trends and logic, which is a departure from the accountability that made search marketing work.

This dilemma is why we love studies like the one released this week by Yahoo and comScore as reported by SearchEngineLand, which essentially support the claim that search advertising has a strong influence on generating off-line sales. It is definitely worth a read, but the take-away is that users that were exposed to search engine advertising spent considerably more off-line than those that didn’t. So those dollars spend on search actually do even more good than the ROI numbers would indicate. The amount of course will vary widely across verticals, but clearly any business with an off-line component is seeing results in search that inherently will skew lower than the actual total benefit of search advertising.

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On the side, I do some consulting to the financial services industry. Basically, investment firms want to talk to agencies and big advertisers “on the front lines” to find out the current state of the search industry to ultimately try to gauge when to buy and sell those stocks and related industry stocks.

Anyhow, aside from “What percent is your client spend up or down this quarter?”, the most common question that I get is this:

“We know that Google makes more money from search than Yahoo, but really, why is that?”

That, my friends, is a downright fantastic question, and the answer truly eludes (or is deemed too “nitty gritty”) the media that covers the search industry. So here goes my answer.

First off, the background of the question is important. Both Yahoo and Google have huge audiences, but even adjusting for their search engine market share something is amiss. By the most recent estimates by Comscore, Google has about a 47.4% market share to Yahoo’s 28.5%. So given a world where you only put dollars into Google and Yahoo, it would be fair to assume that of a $75 budget, we would spend somewhere around $47 in Google and $28 in Yahoo. Put differently, we would expect that for every dollar we put into Yahoo we would spend $1.68 in Google. However, these are far from reality.

Across a random sample of Wpromote’s clients in February 2007, we spent over $3.50 in Google for every $1 we spent in Yahoo. In some industries it can be far more or less pronounced, but just looking at this (admittedly unscientific) sampling what should jump out at you is that taking into account market share discrepancy, Google is making far more revenue per search than Yahoo is. While the exact ratio can be questioned, this monetization gap cannot, so let’s talk about why on earth that is.

• Technology vs. Content. Google is foremost a technology and engineering company, where Yahoo is foremost a media and content company. Indeed, Google was born from a new algorithm (the now ubiquitous PageRank “vote counting” paradigm), where Yahoo was born as a manually administered directory of web sites. Much has changed since then, and Yahoo certainly sits on some excellent technology and smart engineers, but I have always detected a fundamental difference in thinking between the two companies. Google seems to develop new technologies pro-actively while Yahoo addresses technology needs reactively. For example, Google AdWords has been constantly evolving advertising platform, whereas Yahoo’s system remained virtually untouched aside from slapping a new logo on after purchasing Overture, until the recent launch of the new Panama platform. Instead of leapfrogging the constantly adapting AdWords system, Panama is merely playing catchup. I’m thrilled at the progress that Panama made, but it is impressive only when compared with the previous Yahoo system.
• Flexible Platform & Constant Testing - At any given point, Google is testing a whole slew of new features and extensions to the Adwords system. Off the top of my head: CPC site targeting, agency leads, click-to-call ads, print and radio ads, the Adwords Editor application, the website optimizer and more. Many of these fail, but one of these could end up being a major part of Google’s future. From what we’ve seen, this mentality of constantly testing new ideas does not exist within Yahoo’s walls. They seem to operate under the “major update” philosophy of rolling out a massive system upgrade every couple of years. Why doesn’t Yahoo operate like Google in this area? When I asked my engineering friends why this is in simplest possible terms, the answer was that Google is “using a much, much bigger computer”. In other words, with the world’s biggest network of servers at their disposal (nobody knows the number, but there are estimates of 500,000 or more worldwide), Google has the excess computing capacity that their engineers need to develop these new technologies.
• Advertising Platform User Interface - This one is simple, but only experienced by the actual advertisers working with the Adwords and Yahoo Search Marketing systems. Quite simply, Google Adwords works better. Navigating accounts is more intuitive, they have a Client Center for managing multiple accounts, pages load faster, there are tools that help you automate large changes. Man, the list just goes on. Spend one hour in Google and one hour in Yahoo building or making updates to an advertising account, and you will know what I mean. Don’t get me wrong, Google has their own basket of frustrations, from Quality Score updates, to dormant keywords and policies applied non-uniformly. But when it comes to making an interface that just works, Google did it. It’s such a dramatic difference it makes me think that the Yahoo higher-ups have never opened up a Google AdWords account just to see what their arch-rival is up to. Terry Semel, here is my CEO advice to you: spend an hour in your Panama system and an hour in Adwords doing nothing but basic tasks. I assume you have not done this, because otherwise you would not be raving about Panama on your earnings calls. You would have gone to your engineering teams and asked “Why, oh why, does our system not work as well as Google’s? What resources do you need to make it as good or better?”
• AdWords Broad Match Technology - Ultimately, making money off of search is about putting the most ads, and the most relevant ads, in front of the most eyeballs, and having users click on them. Google’s default keyword type (these are the keywords that users would enter to trigger an advertiser’s ad) is known as “broad match”, which means that Google will try to match lots of related search queries to a single keyword entered by an advertiser. For example, the keyword “miami hotels” might also be matched to keywords like “miami florida hotels”, “best miami hotel” and even “miami resort”. The net benefit here cannot be understated. It means that it is easier for advertisers to get more volume and ultimately Google places more ads in front of more eyeballs, which means more revenue for Google. Yahoo has a feature called “advanced match”, but it just doesn’t work as well in matching queries to keywords. Why is this, you ask? Why didn’t they include this major money making feature in the big Panama upgrade? Again, it is my belief that it boils down to technology. In engineering-speak, it is a “non-trivial” (read: very hard) task to match millions of ads to billions of keywords in a fraction of a second. I believe that Yahoo did not have the ability — either in engineering prowess or more likely, computing capacity — to build this functionality.

I could go on, but i fear this post is already running long, so if you want an encore, let me know. Also, my disclaimer: This post was in no way meant to pick on Yahoo. We have a terrific relationship with the folks at Yahoo and working with them is a big part of our business. However, I feel sometimes that there is a resistance to acknowledge any shortcomings and address them headlong. I was absolutely floored when a Yahoo exec told me that they developed the Panama system without looking closely at what Google was doing, as though there was nothing they could learn from them. That is an incredibly short-sighted business perspective, and if this is a perspective that is common among the Yahoo executive management, it could go a long way in explaining their perennial under performance in the search engine advertising market.

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