Google Economist Defends Yahoo Deal via SearchIgnite Report

By Clint Boulton  |  Posted 2008-09-17

Google Economist Defends Yahoo Deal via SearchIgnite Report

It's taken days of browbeating from media organizations and media-fueled hints that the Justice Department is going to contest its deal with Yahoo, but Google has finally come out blazing in defense of its search advertising practices.

Google's Chief Economist Hal Varian denounced a July report from SearchIgnite, which concluded that keyword prices on Yahoo would soar 22 percent once the company completed its search ad deal with Google.

Varian said many of the conclusions the paper draws are untrue and he sought to clarify terms of the deal against a backdrop of criticism and concern.

There's no question a 22 percent keyword price hike would put quite the squeeze on advertisers bidding on ads on Yahoo, which agreed to run Google ads along its search results in the arrangement. The deal is pending approval by the DOJ, which has reportedly hired legal eagle Sonny Litvack to scrutinize Google.

The World Association of Newspapers appears to echo conclusions from the SearchIgnite report in a letter calling for the DOJ and European Union to block the deal. WAN President Gavin O'Reilly said the Googlehoo deal will force advertisers to migrate to Google since they will see diminishing price advantages to advertising.

Yahoo will then have fewer of its own ads to serve and therefore less ability to offer a better deal than Google, O'Reilly said. This would "fatally weaken Yahoo" as a competitor for content ads and syndicated search ads to online news sites.

The WAN letter is likely what caused Varian to pounce on the SearchIgnite report, which suggested that advertisers will be getting the same performance from the same ads, just at higher prices, or less bang for the buck.

"We believe that advertisers will be getting significantly better performance at prices that reflect that improved performance," Varian wrote in this Sept. 16 blog post.

Google Gets Grief from Groups

Varian also said the report does not acknowledge that ad prices are not set by Yahoo or Google, but by advertisers  through the auction process. This process, he promised, will remain unchanged by the agreement.

The economist, who has taken a more active role in speaking out about Google's search business plans since Google and Yahoo announced their partnership intentions June 12, also said the report includes a misplaced focus on cost per click (CPCs) rather than the more important measure for advertisers -- return on investment of their advertising dollar.

One of the reasons Google's ad system has performed so well for advertisers is that our ads tend to be highly relevant to user queries, which makes it more likely that a user will click on an ad and purchase the advertiser's product. We have found that advertisers are generally willing to pay more per click so long as those clicks result in more sales. We anticipate that our agreement with Yahoo will bring more relevant ads to Yahoo users -- which is better for both advertisers and users.

Varian also said the SearchIgnite study "mistakenly assumes" that Yahoo will serve Google ads for as many of its search queries as possible, even though Yahoo has denied it will serve Google ads on search results pages where they have few relevant ads to serve.

Varian has other, lesser quibbles with the report but you get the gist. But why come out swinging now, two months after the SearchIgnite report? I'll tell you why.

Clearly, Google's back is against the wall because pretty much everyone with a stake in the search ad space that isn't named Google or Yahoo is complaining. The clock is ticking for Google and Yahoo on the voluntary 100-day review process by the DOJ.

From the Rural Corngrowers Association, to entities as big as the Association of National Advertisers to the World Newspaper Association, which represents 77 national newspaper associations and 18,000 newspapers worldwide, Google is getting grief for alleged anticompetitive practices.

How will the DOJ respond to the deal?

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