The Real Reason Yahoo’s Revenue Per Search Stinks


Maintaining search share and boosting revenue per search (RPS) is still Yahoo’s (YHOO) most important business priority.  Some recent Compete data, however, suggest that the reason for the RPS gap between Yahoo and Google is actually not fixable, at least not through the improved ad-targeting offered by Yahoo’s new ad-serving engine, Panama.  This, in turn, suggests that Yahoo should reconsider outsourcing search monetization to Google.

Most analysts estimate that Yahoo!’s RPS is about 30% less than Google’s.  The consensus is that this is the result of two factors:

  1. A weaker ad-targeting algorithm (which Panama is supposed to fix), and
  2. Less advertiser demand which leads to lower bid prices on Yahoo than Google.

Judging from some recent Compete data, however, the first factor may not actually contribute to the problem.  John Battelle and Mashable summarized Compete’s findings that Yahoo’ search interface is already more efficient than Google’s, in that a higher percentage of searches lead to a click (sponsored or organic).  This suggests that Yahoo searchers are finding what they are looking for faster on Yahoo than on Google, which could mean that Yahoo’s ad-relevance/matching system is already working very well:

75% of searches performed on Yahoo! in August resulted in a referral [click]. By comparison, searches on Google result in a referral about 65% of the time and searches on MSN/Live result in a referral about 59% of the time. Lower search fulfillment numbers mean that on a percentage basis fewer search queries on that engine resulted in the searcher clicking on a result link. So from this perspective one might consider Yahoo! more effective at getting consumers the results they want.

If Yahoo users are finding relevant links to click on faster than Google users, the entire cause of the RPS gap might be aggregate advertiser bid demand (i.e., advertisers willing to pay $10 for a keyword on Google and only $7 on Yahoo).  Panama might help fix this by improving the quality of Yahoo clicks (by showing an ad only to users most likely to buy rather than just click), but this would require extraordinarily sophisticated targeting.

The Compete data suggests that the real cause of the RPS gap is just raw advertiser demand, which could be the result of scale (Google is far larger) or user demographics (Google’s users might be richer or more sophisticated Internet buyers), or both.  Panama can’t address these factors.   The only way to address them, in fact, would be to increase Yahoo’s search user base (scale) or swipe Google’s users (demographics).  Neither of these “fixes” seem likely.

But there is an easy way fix to at least part of this problem, one that Yahoo has reportedly considered and then rejected: outsource search monetization to Google.  This would address at least the “scale” issue, and, in so doing, boost Yahoo’s revenue per search.  Yahoo may have other valid reasons for continuing to serve its own search ads (closer relationships to clients, control, single platform for all ad types, etc.), but, in choosing to do so, it may be guaranteeing that it will never close the RPS gap.