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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Related posts:

1. The Search Insider’s First Post