Google: a wolf in sheep’s clothing?

An alliance with Google might serve to deliver Yahoo from Microsoft’s clutches, at least for now, but is there a longer-term cost? There are at least three reasons why today’s deal could come back to haunt Jerry Yang.

Scale. If scale is essential for effective monetisation in the search business (the higher the volume of ads, the more efficient and liquid the market - the reason Microsoft gave for trying to buy Yahoo) then anything that increases Google’s scale even more - while reducing Yahoo’s - could tilt the balance still further in favour of the market leader.

Yahoo’s response: According to Sue Decker, Yahoo is already pretty competitive with Google when it comes to the most actively searched terms, and it is mainly the “long tail” of less frequently searched terms where Google can help.

Google’s response: According to Eric Schmidt, “It’s not obvious it makes a significant difference in monetisation” to have the higher volume.

The vagueness on both sides is telling. They don’t dispute the scale effect, only minimise its significance. Without clearer facts, though, the real impact can’t be judged.

Platform reach. If advertisers can buy Yahoo inventory through Google, why wouldn’t they abandon Yahoo’s Panama system and just feed everything through the AdSense network? After all, it takes more effort to learn and manage two systems when one would do as well.

Google’s response: Larry Page was strangely ambiguous. He explained that “sophisticated” advertisers like to use two sources. But then, in a non-sequitur, he tried to extend that thought to other advertisers as well: “I think the effect there is relatively minor for large customers, and the vast majority of the customers there.”

Again, the vagueness is telling.

Investment in Yahoo’s Panama system. All of this creates a paradox. On the one hand, Jerry Yang said that the deal would leave Yahoo financially stronger and so better able to invest in Panama. On the other, for the reasons given above, Panama might be diminished by lost traffic and reach.

What that means for the long-term competitiveness of the system is impossible to judge.