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Yahoo Will Be Testing Google's AdSense For Search Service

May 18, 2008
Yahoo which is battling a takeover attempt from Microsoft, said Wednesday it would temporarily carry Web search advertising from Microsoft rival Google.

The two-week experiment could show whether Yahoo can bolster its slumping finances by outsourcing a key part of its business to Google, the Internet giant.

Yahoo said in a statement that it would run the ads as part of a test that would only last up to a couple of weeks and would be limited to no more than 3 percent of Yahoo's search queries. "This is only a limited test and does not necessarily mean that Yahoo will join the AdSense programme."

As with all such deals, Yahoo would get the majority of the money from the ads and Google would keep the rest. Yahoo would also be able to make significant job cuts to its search advertising team, saving money, according to analysts.

The need to better compete with Google in search-based advertising is at the heart of Microsoft's desire to acquire Yahoo. It said last Saturday that if Yahoo did not agree to the deal in three weeks, it would seek to oust the board and replace it with directors who would vote in favour, and it may lower the price of the offer.

Yahoo's motives for the test are unclear, but the company could be trying to show investors that it has alternatives to boost profits, and ultimately its stock price, other than a Microsoft takeover. On the other hand, the company could be using the test to prod Microsoft into sweetening its offer. Yahoo has said repeatedly that Microsoft's offer of $31 a share is too low.

It's a point that Microsoft Corp., which has faced its own anti-trust scrutiny for its dominance of the desktop software market, hammered home in response to the Yahoo-Google test.

Analysts at Citigroup have calculated Yahoo could boost its annual cashflow by 25 per cent by outsourcing the sale of search ads to Google, because Google has more efficient technology and an agreement would allow Yahoo to cut its own investment in this area. But a tie-up would give Google control of more than 90 per cent of all the advertising sold next to search engine results, putting the deal at risk of being blocked by regulators. Talks in the days after Micro-soft made its hostile offer failed to get off the ground.

Sceptics suggested that Yahoo's renewed flirtation with Google was little more than an attempt to pressure Microsoft to raise its offer.
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