Yahoo Switches To New Panama Search Engine Model

In a significant move in the advertising segment of the Search Engine industry, Yahoo has announced that it is now completely doing away with the bid-to-position model of ads to give way for a more democratic "Marketplace Design" model, more similar to Google Adwords. It is a mixed signal of things to come, and as I shall opine here, might require that Yahoo now start marketing its Search Engine better if they want to continue to sustain their model.

What's the difference?:

In the bid-to-position model, the ads alongside search results are based on an auction system where the advertiser who bids more for the spot gets to bag the spot. In effect, it did not consider the relevance of the search keyword to the ads too much. This model was based on the presumption that though this system fetches fewer clicks on ads than the Google Adwords model, the revenue generated would be higher considering that Yahoo generates more money per click.

Where Yahoo is missing out:

There are a couple of things that I feel Yahoo is missing out. First is advertiser competitiveness. If you look at the Search Engine market share, Google has a huge market share compared to any of the other search engines. For Yahoo, their business model made sense because they focused more on the bid amount (and not on the keyword relevance which is important for higher click-through rates), so that they could discount the fact that Google has a higher market share.

Now with the Panama model, things shall not remain as it is now. The model being closer to Google Adwords, we can safely assume that the ad Click-through rates are similar to what exists for Google (that's roughly 1-2%). Now, that being the same, Yahoo lags behind Google on two fronts: (1) The number of searches made, and (2) The amount bid for a click. Owing to the fact that Yahoo advertisers are catering to a smaller audience than those for Google, this would mean that the newer model has pretty much sealed the leader position in the race between Google and Yahoo with respect to the revenue garnered from the search engine segment.

There is one more aspect to it. Yahoo's Panama model, in my opinion has one basic flaw. I could explain it better with the following quote,

Historical click through rates (CTRs) are one part of how ad quality scores are determined. To get this information, Yahoo will pull data (relative to other ads displayed at the same time) from both the old system and the new Panama system. The new ranking algorithm emphasizes data "freshness" and will use the most current information available.

One parameter of the Panama model is the historical click-through rate. What is surprising is that Yahoo will weigh the ad quality based on the CTRs that the particular ad had garnered through a combination of both the old and new system. The question is why should it take into account the old system? As we know, the old system had one ad unfairly placed over the other owing to the bid amount. This meant that those ads at the top of the table in the old system would have had an unfair advantage of being clicked more than the ones at the bottom. That means their CTRs were higher. If you take this CTR as one of the parameter in the new system, then it would mean that those advertisers who had bid more in the old system will still gain an advantage in the new system. This, in effect would cause their CTR in the new model also to be higher, thus biasing the whole model. It is simply a cascading effect in place.

What it means for the advertisers:

Advertisers should in general be happy about the change. Because now it is more about keyword relevance and less about money power. They can now expect many more clicks on their ads, much more targeted ones at that, which in general should help them in increasing the conversion ratio of customers over mere curious visitors. But then, with minor flaws as I have already mentioned regarding the historical CTR parameter, the model would still help the top bidders of the previous model extend their lead.

But one persisting question is, Why should advertisers remain with Yahoo in the first place? In the previous model one can expect advertisers with not so relevant products, but still enough money to get a return through bidding higher to be interested in the program. But now with Yahoo's model resembling Adwords more or less, why should advertisers come to Yahoo? With a larger search base, they can expect to get many more customers from an ad on Google than on Yahoo. It is still a debatable question, which can only answered over a period of time.