What Does Google See in Yahoo?

Google (NASDAQ:GOOG) is marching forward with its Internet advertising dominance. This week, the technology giant cemented a partnership with Yahoo (NASDAQ:YHOO) and overhauled its AdWords search advertising platform, a move with the potential to increase its mobile ad revenues.

Yahoo, run by former Google employee Marissa Mayer, announced in a statement seen by TechCrunch that it had signed a nonexclusive agreement to display Google’s advertisements on unspecified Yahoo Web properties “and certain co-branded sites” using Google’s AdSense and AdMob platforms, which together allow the company to serve automatic targeted ads to users on both traditional computers and mobile devices.

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The deal could potentially lead to a closer relationship between Google and Yahoo, reported TechCrunch. Currently, Yahoo has a long-term deal with Microsoft (NASDAQ:MSFT) to handle its search advertising business, but Mayer has publicly expressed her dissatisfaction with the partnership, as users and advertisers get better results from Google…
Google wasn’t always in Yahoo’s grasp, but the two companies have begun to forge a closer connection. Rather than situating its display ads into spaces left blank on various websites, Google will be able to distribute its advertisements alongside highly relevant and targeted content thanks to Yahoo’s unique search engine. Yahoo’s search is steered primarily by the editorial content that is posted on its homepage, thereby creating an opportunity for Google to target its advertisements to users’ interests more effectively.

For Yahoo, the partnership will continue to allow Mayer to optimize the company’s advertising revenue. While Yahoo has not been able to keep pace with the growth of the Internet ad market, the company was able to generate its first full-year gain in revenue since 2008 last year, as a result of improvements in advertising. Google will give Yahoo’s ad network greater flexibility and a wider reach. Furthermore, the company’s revenues will also receive a boost. Google typically gives AdSense partners a 68 percent cut of ad sales, but JPMorgan Chase analyst Doug Anmuth thinks Yahoo’s size will enable it to leverage a larger percentage, according to Barron’s.
However, Google is attempting to maximize its advertising profits across all platforms. Because its average cost per click has dropped for the past five consecutive quarters, after increasing for eight straight quarters, the company has decided to change its model. AdWords, Google’s main advertising product and main source of revenue, has been redesigned. In a blog post, the company asserted that the changes would enhance advertising campaigns because they will be able to span a full range of screen sizes from full-sized computers to tablets to phones. Basically, this means that advertisements will be more friendly to mobile devices, and mobile is where Google’s cost-per-click rates have been hurt the most.

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