Google Again Defends Search Ad Deal with Yahoo

Google's North American sales chief reiterated that neither Google nor Yahoo plans to set ad prices in their proposed search ad pact, a deal that has been hotly contested and is expected to be challenged by the U.S. Justice Department soon.

Tim Armstrong, president of advertising and commerce in North America, has issued two blog posts about the ramifications of the deal. One post addresses how the deal will impact advertisers, while the second argues that the deal, a partnership in which Yahoo will run Google's paid keywords alongside its own search results, is good for competition.

Armstrong's Sept. 18 and Sept. 19 posts come after Google CEO Eric Schmidt Sept. 17 admitted to reporters that the company didn't do as good a job explaining the ins and outs of its deal as it could have.

In the post for advertisers, Armstrong said ads are priced by an auction where an advertiser only bids what an ad is worth to it. The Google-Yahoo agreement, he said, will help advertisers convert more clicks into customers by showing more relevant ads on Yahoo, giving advertisers a better return for every dollar they invest.

His comments challenge the assertion by research firm SearchIgnite that keyword prices on Yahoo will soar 22 percent once the deal is struck.

They also feel like a defense against a letter from the World Newspaper Association asking regulators to quash the deal because it would concentrate 90 percent of the search ad market in the hands of two and ultimately push Yahoo to the point of extinction.
Armstrong said Yahoo will be able to show more ads on pages where they previously showed no ads or only a few ads, while advertisers will get more clicks on ads because the quality and relevance of those ads will be better.

Moreover, he denied any collusion on the part of the companies, noting that Google and Yahoo will set minimum bids in their auctions independently. Yahoo won't be able to see the current auction prices for Google ads, and Google won't be able to see Yahoo's prices.

If Google holds true to these pledges, I have no reason to think that they will create an unfair market situation where prices get jacked up. If advertisers set the prices, this is fair.

However, what worries me is that Armstrong's comments feel defensive. It implies advertisers believe Google will rig the system in its favor. That problem, compounded by the overarching concerns about user privacy, could doom the deal for Google.

Now, I have a harder time buying Armstrong's claims in his post today, where he claims Googlehoo is good for competition.

What competition is that? It may put money in Yahoo's coffers, but it will absolutely make it harder for Microsoft or anyone else to make headway in search advertising. But read Armstrong's malarkey anyway, even if for fun.

"This agreement—unlike Microsoft's proposed acquisition of Yahoo—means that Yahoo! will remain an independent company in the business of search and advertising. Yahoo has stated that it will reinvest the additional revenue from this agreement into improving its user services and competing vigorously against Google, Microsoft and other companies."

This is rehash from when the deal was unveiled June 12, but I don't buy it. Yahoo may remain independent, but its search ad business will be essentially co-opted by Google. That probably doesn't matter to Yahoo, which likely believes like the rest of us that the search ad war is already well out of reach thanks to Google.

Yahoo will enjoy Google's "protection" from Microsoft (or anyone else) and will probably take whatever cash—$800 million to $1 billion a year if you believe the estimates—and pump it into an ad business of real value to the company: display advertising.

Yahoo leads the display ad market, with 20 percent-plus of this market, and should continue this lead.  But unless Yahoo gets some mobile ad traction, I fear for its survival. A company of Yahoo's size cannot live on display ads alone.  

Stay tuned until October, when Google and Yahoo are likely to switch on their deal.