June 1, 2007, 12:00 AM

Yahoo pumps up its advertising power

By investing $680 million to buy the 80% it did not already own of online ad space exchange Right Media Inc., Yahoo Inc. is sending a message to rival Google Inc. that Yahoo is here to stay as a major player in online advertising. Online ad exchanges will eventually become the primary means of purchasing online ad media, an analyst says.

Internet Retailer

Yahoo Inc. is adding some advertising muscle with the recent purchase of an ad space exchange and rollout of its search marketing platform. The former could help Yahoo bulk up in the fledgling remnant online ad space market, but the company likely will continue to be bullied by Google when it comes to search marketing.

For starters, Yahoo says it will buy the remaining shares of Right Media Inc., which operates an exchange for remnant online ad space. While only about 20% of online advertising falls into the leftover category, one analyst says Yahoo’s heft will help educate advertisers and web publishers about ad exchanges and make it a more common way Internet space is sold.

“If you fast forward three years or more, the exchange model will become the primary way media is bought,” contends Shar VanBoskirk of Forrester Research Inc., a research and consulting firm.

Eye on Google

Ironically, she says that could benefit Google, which plans to buy DoubleClick, an online advertising company planning to build its own ad exchange. VanBoskirk says DoubleClick, a brand with many existing relationships with advertisers and publishers, is positioned to take advantage of the work that Right Media has done.

Nonetheless, by investing $680 million to buy the 80% it did not already own of Right Media, Yahoo is sending a message to arch-rival Google, says Mark Simon, vice president of industry relations for search engine marketing firm Did-it Search Marketing. “This will definitely say that Yahoo is in the game; they’re here to stay.”

VanBoskirk says about 44% of online ads sold today are categorized as premium positions, such as the home page of a major publisher like the New York Times, and another 35% is mid-tier, or lower-priced space, such as on the paper’s automotive page. The remaining 20% falls into the lowest priced remnant category, and are sold at a discount or on ad exchanges.

Yahoo, which took a 20% stake in Right Media last fall for $45 million, says it has tested the Right Media Exchange with its own unsold ad inventory in the past few months and seen revenue from that inventory go up roughly 50% when sold in an open marketplace, Yahoo chief financial officer Susan Decker told analysts recently.

Decker said Yahoo is paying for Right Media half in cash and half in Yahoo stock. The deal is expected to close in the second or third quarter. Right Media, a privately held company, was founded in 2003 by Michael Walrath, who remains its CEO.

Searching for market share

Yahoo also halted its declining market share for paid search advertising when it introduced its Search Marketing advertising platform earlier this year, according to a new study from SearchIgnite and RBC Capital Markets.

Big brand marketers benefited most from the Quality Index introduced by Yahoo Search Marketing, formerly called Panama. Those marketers experienced a 37% decrease in the cost per click, according to the study, titled “Yahoo Panama and the Broader Search Landscape: A Q1 2007 Competitive Review.” The index measures the expected relevance of an ad based on factors such as its historical click-through rate. Before Search Marketing, Yahoo ranked ads based on the highest bid. Since the new platform’s launch, it ranks ads based on both the bid price and the index.

However, the study found that while Yahoo’s quality index ranking algorithm has improved its ability to monetize its search listing pages, it still lags Google in this area and is losing ground.

Google made changes in its Quality Score algorithm during the first quarter, resulting in a better-than seasonal showing in click-through rates, the study says. For example, Google’s March 2007 eCPM (effective revenue generated by Google per thousand ad impressions served) declined by only 4.6% from February to March, compared with a 24.7% drop in the identical months last year.

The report-which tracked more than 14 billion impressions and 144 million clicks across more than 500 marketers-was compiled based on research conducted beginning in 2006 and running through March 31, 2007.

SearchIgnite is a search and media management technology provider managing more than $200 million annually in paid search. RBC Capital Markets tracks Yahoo.

billb@verticalwebmedia.com

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