Yahoo Creates Its Own Black Box for Advertising

Yahoo! creates floating-minimum-bids system similar to Google Adwords.

Yahoo! (YHOO) has informed its advertisers that it is changing the minimum bid price for search ads on its site. The minimum bid was ten cents; now it will be a floating minimum. This is similar to Google’s (GOOG) system that affixes a minimum bid to your keywords depending on the quality of the ad text, keyword selection, and your landing page.

If there’s one thing advertisers don’t like, it’s lack on transparency on how they are being charged for ads. Google’s current system and Yahoo’s new system certainly lack transparancy. Ask any Google advertiser what they hate most, and they’ll likely say “I hate creating a targeted ad campaign and then having Google tell me that, because my ads are relevant, my minimum bid is $5.00 per click.” Or “I hate how my click price averages 50 cents one day and 90 cents the next. Why?”

Here’s a little background. Pay-per-click search ads originated with GoTo.com. It had a strict “bid for position” system. If you bid 25 cents for your ad and someone else bid 24 cents, you would be the first ad on the page. After a while, Google adopted this system and realized that it didn’t maximize profit. To maximize profit, the search engines have to consider the click through rates of the ads. For example, if your competitor’s 24 cent ad gets twice as many click throughs as yours, then it should show up above your 25 cent ad because the search engine will make more money. This is fair and easy to understand for advertisers: it’s transparent.

Then came the “black box”. This black box apparently takes into consideration your ad text, the keywords you choose, and the “quality” and “relevancy” of the page you send clicks to. Google provides general guidelines, but they’re tough for the average joe (and even sophisticated advertisers) to figure out. Ranking high in Google Adwords is almost as difficult as ranking high in Google’s organic search results. The end result is lack of transparency.

Compounding matters is that the search engine’s black boxes just don’t work. They flag ads as “bad” or “irrelevant” that are very relevant, while allowing pages full of ads to float to the top. Here’s a recent case in point with Microsoft AdCenter. I have an ad campaign for a music site that their automated review system flagged as both an “adult entertainment” site and as being related to alcohol. Why alcohol? Apparently by including the line “CC required” in my ad to indicate a credit card was required, the system picked it up as “Canadian Club”, and alcohol. The manual review process for flagged ads can take literally weeks at both Microsoft (MSFT) and Google.

Will these changes at Yahoo affect domain parking companies that use its feed (such as Parked.com and Active Audience)? Content bids will remain a minimum of 10 cents, but I believe many parking companies actually use Yahoo’s search feed. If this is the case, and Yahoo’s magical black box actually increases profit for the mothership, then hopefully this will be passed along to parking companies.

We’ll see about that.