Big Changes at Yahoo!, Big Commitments from Microsoft

It’s been a big week for two of the Big Three search engines. On May 4, Microsoft held its annual MSN Strategic Account Summit in Redmond WA, where Microsoft CEO Steve Ballmer reaffirmed plans to spend $1.1 billion in research and development on MSN in the fiscal year that starts this July—twice the amount the company spent last year.

That accounts for a large portion of the $2 billion-plus in extra costs that the company’s Q3 financial report said it expects to incur in the coming year. Wall Street reacted to that news by erasing $31.6 billion from Microsoft’s market value, in the heaviest trading day in the company’s history.

“I think we surprised some in the financial community with some of this last week,” Ballmer joked (per the Microsoft transcript of the summit). “But our dedication and determination to invest in important ways in this business is strong. And we will invest as much in this online opportunity in R&D as any of the other big players in the market.”

What’s more, Microsoft’s Q3 statement reported a 7% increase in ad revenue over Q3 2005. That compares to a 79% year-to-year revenue increase at Google and a 35% increase in ad revenue at Yahoo in their most recent quarters.

All this occurred soon after comScore Networks found that search on MSN and Microsoft sites fell to 13.2% of the total search market, down 3.3% from the same period in March 2005.

Ballmer’s refusal to back-pedal the company’s commitment to its online business in the face of some daunting market facts is the right response, according to Peter Hershberg, managing partner with search marketing firm Reprise Media.

“It’s been years since we’ve seen Microsoft attack any market with the vengeance with which they seem to be going after the search market,” he said. “Investing a lot in R&D is absolutely what’s required to get ahead in the search game. Google has some very smart people and has spent a ton of money to create the advantage they have in the industry, and Microsoft recognizes that they’re going to have to make a similar commitment.”

Hershberg pointed to the hiring of Steve Berkowitz away from the CEO post as Ask.com as another step that should pay off for Microsoft.

“Good, fast, relevant search results” are what will help Microsoft win search-engine users, said Rob Murray, president of search marketing firm iProspect. “I think they’ve made very good strides in making search results better in the 12 months since they launched their organic index. Their first foray into search was probably not as strong as they would have liked, but I think they were more worried about speed to market than product quality. We think there are enough good things in their product that will make them a very viable search property for a lot of distinct consumers.”

Another commitment signal from Microsoft was the full launch of its adCenter performance ad platform, which now totally replaces the search ads MSN formerly syndicated from Yahoo! AdCenter has generally been judged a next-generation paid-ad service for its ability to target keywords by gender, demographic, income and time of day. An MSN spokesperson said adCenter would eventually be extended to Microsoft’s Web-based Windows Live and Xbox Live services. MSN is also working on a contextual ad program and tools that may improve behavioral targeting of ads in content such as blogs.

Three days after the MSN Summit and 850 miles down the Pacific coast, Sunnyvale CA-based Yahoo! released some salient details about the first big revamp of its search platform since it bought the Overture ad-auction business in 2003.

Since an analyst’s report first leaked news of “Project Panama” more than a month ago, it’s been known that Yahoo! is planning to re-orient its pay-per-click (PPC) ad business to more closely resemble Google’s, and that turns out to be true. The company is installing the data infrastructure that will permit it to decide which ads are placed on search results pages not only by the bid price paid by advertisers—as has been the case up to now—but on a complex of other factors including relevance, as judged by the number of clickthroughs the same ad has received in the past.

Here’s a breakdown of some of the other capabilities to come in the new Yahoo! PPC platform:

* Geo-targeting, based on technology Yahoo! got with the purchase of Whereonearth last year, so advertisers can type in a neighborhood like Fenway Park and get their ads mapped to postal ZIP codes. Google currently offer geo-targeting of search campaigns.

* Greater visibility into ad campaigns. Marketers will be able to enter their keyword, campaign budget and bid price and see what position that will buy them (in the current market), estimates of monthly impressions and clicks on that keyword, and what percentage of those clicks they can capture in that ad position. Sliders will let marketers see how raising their bids or their budgets could reap more clicks.

* Speedier, easier optimization of ad campaigns. Yahoo! will no longer insist that keywords be linked to a single ad title and landing page. Instead, advertisers will be able to rotate ads on a keyword, showing the highest-performing ads more frequently if they wish.

* Persistent ranking data. Under the new system, marketers will be able to pause a campaign without losing the rank data for that campaign—which could be an important resource for future advertising.

* “Assists”, or cookie-based tracking to trace conversions through multiple clicks on a PPC ad, not simply the last one.

* Faster content review for quicker campaign set-up.

These big changes won’t happen at once. In fact, Yahoo! has not even officially announced the new program and probably won’t do so until its annual analysts’ meeting on May 17. what’s known to date came out on Monday, when Yahoo! released the application program interfaces for the new platform to third-party developers who might want to build special software for use by advertisers or ad agencies.

According to the Yahoo! release, the first phase of the new system rollout—the data infrastructure—is just about done. The second phase will begin in Q3 2006, when the features bulleted above are turned on for advertisers. Once marketers have begun to use those tools, Yahoo! says, it will turn on the quality-based ranking model for search ads.

The company says future enhancements to the platform could include “additional distribution options”—possibly including on mobile devices and TV—and demographic targeting similar to that being offered by Microsoft’s adCenter.

Adding a quality ranking may cause a seismic shift in the bid pricing for Yahoo! search terms—one reason the company is phasing the new system in at a carefully measured pace.

“The new system is going to focus on relevance,” said John Tawadros, iProspect’s vice president of client services and technology. “So the smaller niche players who are very specific to a search term are probably not going to have to pay as much. But it may cause the larger players to spend more to get the same good ad positions because of their reduced relevance to the terms.”

Yahoo! has been able to get by for years with the pure auction-based ad model it bought in Overture, mainly because the search marketing channel has grown as a whole. But now some forecasts suggest that search may be in for years of lower growth and, with the entry of adCenter, more competition for those less-abundant ad dollars.

By factoring quality as well as price into its ad-serving decisions, Yahoo! hopes that more relevant ads will perform better for marketers and lead them to spend more on PPC campaigns.

“There are a certain proportion of advertisers who always looked to Yahoo! to ‘pay and play’—just bid high and get their ads shown, without worrying about the quality of the ad,” said Samir Patel, CEO and president of bid-management company SearchForce. “But I think Yahoo! is thinking about maximizing their overall profitability. Showing better ads gets quality clicks, which leads to more conversions and better [return on investment (ROI)]. If advertisers get better ROI, they invest more money.”

Aside from the benefits that may accrue from the new quality-based rankings, Yahoo!’s data system was simply in need of the kind of forklift upgrade that the new model called for. “Yahoo!’s had a lot of growing pains, and I think they’ve been hurt by the fact that it took them so long to get their system up to date,” said Hershberg. “Until this upgrade, their direct traffic center was having all kinds of issues literally on a daily basis. For a period of about 30 straight days, we got daily notices that we could not access our data, and some advertisers couldn’t even log in to Yahoo!’s system.”

Partner Content

The Gift of Wow: Preparing your store for the holiday season - Netsuite
Being prepared for the holiday rush used to mean stocking shelves and making sure your associates were ready for the long hours. But the digital revolution has changed everything, most importantly, customer expectations. Retailers with a physical store presence should be asking themselves—what am I doing to wow the customer?
3 Critical Components to Achieving the Perfect Order - NetSuite
Explore the 3 critical components to delivering the perfect order.
Streamlining Unified Commerce Complexity - NetSuite
Explore how consolidating multiple systems through a cloud-based commerce platform provides a seamless experience for both you, and your customer.
Strategies for Maximizing Mobile Point-of-Sale Technology - NetSuite
Learn the top five innovative ways to utilize your mobile POS technology to drive customer engagement, increase sales and elevate your brand.