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February 6, 2007

A group of Yahoo executives will begin testing their new Panama search marketing platform.

Overall, Yahoo will be analyzing a whole set of moving charts projected on walls, while comparing them with a team of about thirty-five engineers for any possible signs of trouble.

Yahoo flipped the switch on its new Panama search advertising system yesterday, and is very upbeat about it.

Brian Acton, v.p. of engineering at Yahoo Search Marketing said “it’ll be a good event if it is a nonevent.” Yahoo’s investors and advertisers will be looking for something eventful to start happening in the weeks and months after the company has ironed out any potential bugs in the new platform.

Panama is Yahoo’s long-awaited project in closing the wide gap with Google in the race for search advertising supremacy, a rapidly-growing and lucrative business that Google dominates in the industry.

Overall, Panama is the most important new product for Yahoo in many years.

“This is something that could potentially affect the largest and most profitable business segment that Yahoo currently has,” said Mark Mahaney, an analyst at Citigroup.

Among those who will be watching closely on Panama's overall progress is Yahoo’s CEO, Terry Semel. "We will be watching this very closely for many months,” he said. “It has been and continues to be our number one priority.”

This is actually no surprise. Many analysts who follow Yahoo closely say the delay of Panama is the biggest reason Yahoo's stock dropped from a high of more than $35 early in 2006 to just over $22 last October. Yahoo shares have since regained some ground, closing last week at $28.77, but still have a long way to go.

In its simplest form, Panama is Yahoo’s attempt to place ads right in front of users that are more likely to be clicked on. Up until today, Yahoo gave top billing to the advertisers who were willing to bid the most to have their ads listed alongside a particular search result.

It's biggest competitor, Google, has a totally different formula which Yahoo is trying hard to replicate. It ranks ads on a mix of bid prices and relevancy to the user. That leads users to click on ads more frequently, and since advertisers pay only when a user clicks on their ad, Google, on average, makes more money on every search than Yahoo does.

Additionally, since Google is a lot better at matching ads with users, the system is more efficient for advertisers, creating an impetus that rewards Google with a very powerful edge.

“I spend a majority of my dollars on Google,” said Amy Wong, global online marketing manager for the software security firm Trend Micro. “I’m glad to see that Yahoo is trying to get their act together.”

Ms. Wong said she would like to distribute her ad dollars more evenly among Google, Yahoo and MSN, the third major player in search advertising.

Overall, Mr. Mahaney estimated that last year, Google made about 4.5 cents to a nickel on every single search, while Yahoo generated only bout 2.5 cents to 3 cents for each search. The difference adds up to billions of dollars a year!

As crucial as the success of Panama is for Yahoo, it is not the only single challenge facing the company. As Google’s share of all searches has grown steadily over 2006, Yahoo’s has remained very flat. What's more, the company also faces increasing competition in its display advertising business.

And while Yahoo is going through a tough reorganization aimed at making it more nimble and more accountable, crucial posts remain unfilled, and some investors are waiting for the company to lay out a clear strategy.

“Make no mistake: Panama is very important to Yahoo, but it's not the only thing they need to focus on,” said Ellen Siminoff, a former Yahoo executive who is now chief executive at Efficient Frontier, a search marketing firm.

For now, however, all eyes are directly focused on Panama. Terry Semel acknowledges that Yahoo was late in starting its new project. He said that happened partly because Yahoo’s search advertising system, which the company acquired through its takeover of Overture Services for $1.6 billion in 2003, was performing well, and it took time for executives to realize just how much better Google’s system was.

But once Yahoo assembled the Panama team in mid-2005, “things did come together quite quickly,” Mr. Semel said. Those who worked on the project described the effort as a huge undertaking. They compared it to rebuilding an airplane in midflight, as engineers had to keep the old advertising system running while they put the new one together.

The first phase of the project, which went into operation in mid-October 2006 (two months later than planned) includes a completely new interface for advertisers. It provides them with a digital dashboard where they can manage their marketing campaigns, aim ads geographically and test their overall effectiveness.

Yahoo's new Panama search platform also includes interactive tools that suggest to advertisers what to bid on based on their budget, and the number of new users they aim to attract. Most of those new features are already available from Google and even MSN for that matter.

On average, Yahoo engineers say Panama has some very unique features, like a “quality index” that gives advertisers a sense of how the system will rank an ad, and sophisticated analytical tools that empower advertisers with a better insight on why certain campaigns are effective and others are not.

Yahoo claims its new system can be upgraded without disrupting it in any way. It's intended to be flexible enough eventually to handle video and audio ads and to distribute ads to mobile devices.

While Yahoo offers few specifics, it says Panama will some day play an important role beyond search advertising.

“For us, Panama is a springboard to start sewing together all our advertising assets,” said Tim Cadogan, v.p. of Yahoo Search Marketing. Yahoo has been gradually moving advertisers to the new system and expects to complete that task in the U.S. some time in March.

Additionally, while some advertisers have run into certain problems, Yahoo's new system has generally been well received. “In terms of ease of use, Google is still the undisputed leader. However, Yahoo and Microsoft have made great strides in coming up where they are today,” said Matthew Greitzer, director of search marketing at Avenue A Razorfish, an online ad agency.

But the part that matters most to Yahoo’s bottom line will come very soon, when the new ad-ranking algorithm begins its work, expected some time later this week.

On Feb. 1, the company ran a test in which searches originating on the West Coast ran the new ad ranking system. The team started at 3 AM PST, and by lunchtime, the engineers gathered in the war rooms, many with bags under their eyes, and appeared satisfied things were running smoothly.

Mark Morrissey, v.p. for product search at Yahoo Search Marketing said “our tests today went beautifully. Just about everyone inside and outside Yahoo expects the system to generate more revenue for the company, but no one knows exactly how much more."

In December, Yahoo cautioned investors not to expect the financial impact of Panama to show up until the second half of 2007. That is in part because as the system is introduced, some advertisers will end up paying less and some more for each single click, as ads vary in how likely they are to attract a click from a specific searcher.

Search marketing experts say that in general, the well-known brands will get better placement for their ads at lower bids, because people are more likely to click on them. By the same token, the reverse will be true for lesser-known brands.

However, those dynamics may vary greatly depending on keywords and how carefully advertisers aim their pitches. Yahoo says a customer service team has been working with advertisers to help them understand how to make ads more relevant and to make them perform better.

Regardless, it will take time for the marketplace to adapt to the new system and for Yahoo to fine-tune it into a product that can really help advertisers in their day-to-day jobs.

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Source: New York Times