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There has been some recent discussion in the press about the potential impact of our advertising agreement with Yahoo! on ad pricing, and we wanted to help clear up a few misconceptions.
Some of those misconceptions appear to be based, in part, on a July report by SearchIgnite that concluded, among other findings, that once the agreement is implemented, keyword prices on Yahoo! might increase by an average of 22%.
After taking a close look at the study, I believe it makes several flawed assumptions and uses questionable methodology. The paper suggests that advertisers will be getting the same performance from the same ads, just at higher prices. We believe that advertisers will be getting significantly better performance at prices that reflect that improved performance.
At one time individual brokers in various geographic localities could interpose themselves between investors and the NYSE, and take a significant cut of every stock sale. But electronic trading cut the cutters out, and made investing more profitable for the people who matter -- the investors.
Google's continually trying to make their market more efficient -- so people who used to take large advantage of pricing inconsistencies will find the pickings slimmer and slimmer--they'll get squeezed out because advertisers can count on the market to give the best price. And this is just another step in the process.
Note that it has nothing to do with competition--Google's competition is other genuine market makers, not the arbitragers that parasite every genuine market maker. But the other real market makers will have to keep up with technology, or die. (Like the former search engines that couldn't match Google's anti-spamming technology...) So the end result of BETTER competition may well be FEWER competitors.
It's always a trade-off. Society can't afford too many competitors, any more than it can afford too few. I suspect consumers think advertisers are a glut on the market right now, and would appreciate less investment money channeled into advertising and more money channeled into creating content worth advertising.
First and most importantly, the report fails to acknowledge that ad prices are not set by Yahoo! or Google, but by advertisers themselves, through the auction process. Since advertisers set prices themselves via an auction, the prices must ultimately reflect advertiser values.
Does anyone know if their agreement means that Yahoo would be able to show our Google ads on yahoo's "Search Partner" network. If my $15/click adword ads start showing up on Yahoo's partner sites I will freak.