Yahoo Retools Ad Technology

Ranking System Ends Pay-for-Placement Ads in Search Results

Yahoo upgraded its search advertising system yesterday, making a high-stakes technology change that lies at the heart of its efforts to catch up to Google in the race for online ad dollars.

Yahoo's search-engine makeover has been delayed several times but is considered so significant for the company's future that executives code-named it Panama, after the canal. In the past few years, Google has continued to dominate the market for Internet ads, in part because its technology served up more relevant, and therefore more lucrative, ads. This forced Yahoo and Microsoft's MSN to overhaul their search engines to try to match Google. This year, Wall Street analysts expect Google will face tougher competition.

"Over the last couple years, Yahoo has been surprised at the success of the other players in the market," said Matthew Greitzer, national director of research at Avenue A-Razorfish, an online advertising firm. Panama is Yahoo's attempt to "equalize [its] competitive standing with Google and MSN," Greitzer said.

The project at Yahoo required rejiggering the engine that determines which "sponsored links" are placed at the top or to the right of Yahoo's search results. Until yesterday, Yahoo positioned ads by highest bidder, so sometimes the top results were not the most relevant ads.

Now, Yahoo will rank ads, similar to what Google does. Yahoo will place ads based on both the bid price and measures of the relevance of the ad, such as how often someone clicks on it. Yahoo's new engine will also allow advertisers to focus their campaigns by location of the Internet user and other demographic data, features that have been offered by the company's competitors for some time.

Yahoo said it will take months to see financial results from the new system. The company, whose stock took a hit last year when it announced the delay of the project, warned investors that it does not expect to see any financial benefit until the second quarter, which ends June 30.

Tim Cadogan, Yahoo's vice president of search marketing, said the changes will create "dramatically" different results in some searches and less noticeable changes in others. "The whole notion that I can buy my way to the top [of sponsored links] is something we do want to move beyond," he said. "What's most exciting today is we're launching a platform that will enable us to improve and change over time."

Cadogan said Yahoo plans to allow advertisers to buy display and video ads next to search results using the new technology, though he would not specify when.

In the meantime, advertisers have been closely watching how the new search ranking system will affect their ads. "We are sitting here, waiting and watching to see what happens," Greitzer said. "Every advertiser is eager to see how the new landscape looks."