Yahoo can kill Google AdSense for Content

I got an email from one of my readers, Todd, in response to the Viacom post:

“Curious on your latest post – why do you lambast Google for ‘paying hopelessly little to publishers who use AdSense’, when it’s pretty clear from their financials that they pay out nearly 80% of ad revenue to adsense publishers? publishers make money right alongside google, do they not? and don’t you use adsense on your site? why not yahoo if you think google pays so little?”

I thought, this is a question on the minds of many out there, so decided to make it a full blown post.

My response: “No they don’t. First they don’t even disclose what % they share with publishers. It’s not 80% by any means. And second, I am going to switch out of Google as soon as I have reached the threshold of traffic that I need to work with a targeted CPM based ad broker firm like FM.”

Or, to Yahoo, if Yahoo got its act together on Yahoo Publisher’s Network (YPN), which as it stands is also screwed up.

Todd comes back with more questions: “I need to understand this a bit better then. Do you look at Google’s financials? They break it out pretty clearly that, for example in 2006, they brought in $4.2 billion in revenue from their ‘google network’ (affiliates), and paid out TAC of $3.3 billion, or 79%. There may be a few other things in that 79% tac number, but it shouldn’t be much (distribution arrangements). I’d be surprised if it was much less than 70-75% that they paid out. Unless – is there just a huge disparity between what they pay various publishers? Ie AOL gets a big cut like 85% and a small blog get 50-60%?”

Bingo, Todd. Tiered pricing is exactly what Google has in its AdSense for Content.

“And I guess once you hit a certain traffic threshold cpm ads can generate more revenue than cpc? Or is it a function of federated’s network that makes it more profitable?”

* CPC = Cost-Per-Click = Someone has to not only “view” the ads, but actually click on it, for the publisher to get paid.

* CPM = Cost-Per-Million = Someone ‘desirable’ simply needs to view the ads for the publisher to get paid.

Google has 2 problems :

(a) The CPC business model is too advertiser friendly, and not adequately publisher friendly. The advertiser still is getting to show the ad to an audience, basically for free, without compensating the publisher. I want the more fair CPM model, where this freebie is taken away. [Granted, that the CPM model is only effective if you have a very targeted audience.]

(b) The ‘cut’ that Google takes is too high, off the ad revenues a small site generates. I want this to go down.

These are the two issues that FM, WPNI, and others are trying to address, by selling CPM Ads and offering 60% of the revenues to publishers. 60% I think is still too low. They justify it by saying that they need the 40% commission to support their sales force. For the moment, I am willing to accept that argument.

This is Yahoo’s opportunity, though. It follows up on my previous recommendations of organizing Yahoo into segments, as well as the Web 3.0 framework discussion.

YPN should offer to the AdSense customers a switching incentive to the CPM model, offering them 85% of the ad revenues, and a clean alignment with their various target verticals. As soon as the publishers are also aligned by vertical segments, it would become a great deal easier for advertisers to plan a media buy that focuses on a certain segment. Recently, Lufthansa bought ads on 100 Travel sites via Washington Posts Blogroll program at fairly good CPMs.

Yahoo is well positioned to leverage this opportunity at a much larger scale than FM, of course, although, FM has advantages in certain niches that may not be priority segments for Yahoo right away.

Viacom’s suing Google is a good step forward to adjust the business models of the video industry. Similarly, I would like Yahoo to become more of a threat to Google on AdSense, so that the unfair business models turn into win:win, sustainable ones that can carry the industry forward.

After all, competition is an essential force in a market economy.