The Yahoo-Bing search alliance is gathering momentum. Watching this coverage from the U.K., where Google has close to 90 percent market share, I can't help asking: will the deal succeed for both parties -- and what does success look like?
Focusing on the Numbers
For Yahoo, the obvious win is cost saving -- no longer employing staff or maintaining systems to process billions of searches a year and monetize them. We've already seen several waves of layoffs from Yahoo, including search staff.
For Bing, revenue is the win. More searches to monetize means more paid search revenue (although Yahoo will receive payments from Microsoft). Alongside this, they will no doubt hope to attract new advertisers from Yahoo's bank of accounts, raising competition between advertisers, and therefore bid prices -- further adding to their bottom line.
This is the virtuous circle any paid search division wants to fuel -- more advertisers, increased keyword coverage resulting in an increased average number of advertisers per keyword, increased bid completion, and a higher average revenue per click.
This is the circle that both Overture and Espotting worked hard to fuel at the start of last decade when paid search was in its pre-AdWords infancy. Working at Espotting, I experienced how keyword coverage and bid competition were major concerns -- and when the company lost Yahoo Europe as a distribution partner, I saw the circle slowing, coverage shrinking, and CPCs falling. Bids that once reached a high point of £15 ("serviced offices") fell beyond the £3 mark as volume, quality and CPCs fell.
Which brings us to the risks...
The Risks for Yahoo
The risks for Yahoo are around revenue, market share, and brand differentiation. If the average revenue per click Yahoo receives under the deal is significantly lower than from Panama, they will suffer financially. However, the operating expenses they save may outweigh this loss. Overall, they will be in a better position.
Aside from CPCs, the long-term risk for Yahoo stretches beyond search into their wider business.
Yahoo has stated they intend to continue differentiating themselves via their search interface. Fine in theory, but there's real risk here.
Doing this without a large search team of the ability to reach inside the machine is difficult. If consumers learn over time that Yahoo is effectively Bing, and decide there's no reason for them to stick with Yahoo, will they go directly to Bing?
Inertia often rules our behavior as consumers, but with Bing running advertising campaigns and offering cash-back schemes to attract consumers, the lack of a unique search experience on Yahoo may be enough to push some consumers to go straight to source and get cash back on their purchases into the bargain. The word "frenemy" springs to mind.
Any lack of search market share could impact their wider business. Content is undoubtedly part of Yahoo's core strategy -- even more some with their acquisition of Associated Content -- and one of the main ways visitors get to this content is via search.
So any decline in the flow of traffic from Yahoo search into their own properties will hurt their revenues from display advertising -- and undermine the data gathering that is at the core of the behavioral advertising, ad exchanges, and other initiatives that in turn are crucial to Yahoo's non-search advertising revenues.
Yahoo search traffic isn't their only source of traffic and data. They receive traffic from the other engines and other areas of their properties, and they gather data from display ads across many other sites as part of their wider network (just like Microsoft does across its network).
Yahoo will have to innovate to ensure they can offer search retargeting for their display clients. Right now, Microsoft and especially Google are innovating in this area.
So for Yahoo, the risk is a decline of overall market share -- and revenues beyond search alone.
The Risks for Bing
The obvious risk: the numbers don't add up, and the revenues from the Yahoo deal are less than the costs of the partnership to Bing, even if they have increased their market share. This could vary significantly by country; in some, Bing-powered Yahoo may prove profitable; in others, average CPCs may make the deal less attractive versus costs.
The other risk is less obvious and more damaging for Bing's ambitions. What if Yahoo's users don't like Bing search results?
If Yahoo's audience perceives a decline in the quality of results, they may shift to Google -- hurting both Yahoo and Bing in the process. However, Microsoft is investing a lot of money, time, and -- crucially -- talent into their search division, so this seems, on the surface, unlikely.
So, Will it Succeed?
I believe it will be a success -- in terms of revenue, and in terms of market share (Google won't be seriously challenged anytime soon, though).
The real story will be what Yahoo does next, and how the frenemy relationship works out while they compete in the display and mobile spaces -- and Google builds their display armory around AdWords and DoubleClick.
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