Steve Ballmer said a deal between Microsoft and Yahoo! Inc. may still make economic sense for shareholders of both companies.  This not-so slip of the tongue at the Gartner conference in Orlando on October 16th of course sent Yahoo shares up during another one of the daily rapid cycling behaviors of the daily market performance.

Since the beginning of the year, Microsoft has been looking at Yahoo!  No need to review the already well-known history of this story - the first bid of $47.5 Billion and the second bid of $33 Billion.  Today, Yahoo! Has a Market Cap value of $16.5 Billion and if Microsoft were to re-engage in talks with Yahoo! they would most likely no longer bother looking at the totality of the company but rather a subset of just the search business. 

Why is Microsoft waiting - if they are waiting at all?

First, there is the Yahoo-AOL deal.  AOL reports earnings on November 5th.  So if there is any information to be revealed it may come out during that call.  Second, is the DOJ investigation into the Google-Yahoo advertising deal.  Microsoft has no choice but to wait and see how these two situations play-out based on how Yahoo! has responded to previous buy-out attempts. 

Carl Icahn’s appointment to the Yahoo! board was originally thought to be a stimulus to making a sale happen, but that has not been the case thus far.  Instead, the leadership remains in place and the core strategies remain largely unchanged.  Quarter-end results were received negatively last week and the company continues to erode in front of our eyes while a 10% RIF further indicates the downward spiral of this former tech-darling giant.

Is this the end of an era?  “Do you Yahoo?” has been replaced with “Google-it.”  Yahoo has historically demonstrated a poor acquisition strategy, falling short on implementation.  They have grown and stalemated their text advertising business, returning to a display advertising strategy rife with technology glitches in a market where advertisers are placing heavy bets on direct response rather than CPM. 

What does all of this mean?  The writing is on the wall – in big, bold, block letters.  Yahoo! has no clue what they’re doing any more.  Balmer will strike when the timing is right, if at all.  When will that be?  After DOJ finishes demonstrating that they have a mighty strong case. 

The DOJ has conducted tons of interviews on this deal and these conversations have undoubtedly gone deeper than just the deal.  While the DOJ may be focused on the potential of Google gaining an 80% stake in the search market, they are also having significant light shed on the ever-changing algorithm that forces everyone to change their technologies on an ongoing basis.  They are learning about the occurrence of price inflation on popular keywords which has been taking place even as advertisers decrease spend – indicative of unnatural pricing pressure within the auction.  They are learning about the industry-wide pressure being placed on distribution partners in terms of their sources of traffic – such as the arbitrage business - and the squeeze that is occurring with regard to Google no long paying for what they arbitrarily deem to be “suspect” traffic.  The DOJ is learning about exclusivity requirements placed on publishers that require only Google ads on pages, blocking other sources of ads from competing on the page. 

These are just examples of the domination business practices, which are commonly known within the industry and that are being brought to light for the DOJ.  I don’t think that any of these issues will come up now, with regard to the Google-Yahoo! deal, but the DOJ is getting heavily educated.  Which is about time!  What it does all mean is that the next time someone raises a red flag, which may be sooner than later, the DOJ will have a solid understanding about why there are issues and what the complaints reference.  And most important this exercise will position the DOJ well going forward with the right mindset for HOPEFULLY preventing the monopolistic avenue that Google is traveling.

So will Microsoft buy Yahoo?  Maybe.  Is it worth that much to Microsoft?  At the end of the day, Microsoft’s core business is the Office platform.  Not the operating system.  A huge portion of their revenues have been from Office for a long time.  Other LOBs add to that stream including advertising, search, XBOX and Vista, but Office carries the ball.  But Microsoft continues to declare that they want to compete in the Search realm but as the #3 player they have to do something disruptive to stay in the game long term. 

Buying Yahoo! only buys time.  It buys a degrading market share – both Yahoo! and Microsoft are losing share every month to Google.  They can look beyond Yahoo! and consider buying additional share from the remaining 10% that is not controlled by the big three engines, but all of that only buys more time from the inevitable trend.  ASK has some recognizable share – but 95% of their search ad revenues come from Google as well.

So I don’t think the question is so much will Microsoft buy Yahoo!.  I think the real question is what will Microsoft do after they buy Yahoo!.  Here are the most current share positions as provided by Comscore:

Google  62.9%
Yahoo  20.2%
AOL  4.1%
Microsoft 8.5%
Ask  4.3%

If Microsoft buys Yahoo! they will have 30% market share.  But again, that number will erode over time.  If Yahoo buys AOL, that only lifts Yahoo by 4% - not much of a gain.  Microsoft could still look to buy the combined Yahoo!-AOL search business – however unlikely – bringing them to 34%.  ASK combined into the equation would bring it to 38%.  But of course that will never happen.  ASK is tied up with Google and I can guarantee you that there is a clause that says IAC can’t sell ASK to anyone without Google’s approval.  You can bank on that one.

So again, what does Microsoft plan to do after they buy Yahoo! to stop the erosion.  Buying time is not much of a plan.  Unless there is some plan to go after the jugular that pinpoints the rapid growth of Google’s climb to dominance Microsoft will still be playing a losing gain.

Let’s get some conversations going on this one.

In the late 90s it was clearly the advertisers who had the control.  As they began to test the new medium and brought dollars to the internet in increasing amounts, advertisers tested all kinds of mechanisms that the publisher could come up with.  But it was the advertiser that dictated what measured performance, what the price they would pay and what services they expected in terms of campaign management and reporting.

Then the pendulum swung in the other direct – towards the publisher – as online media shifted from "new media" to internet advertising.  “Standards and policies" were written.  Publishers started driving pricing; and ad server utilization, campaign management provisions and acceptable reporting became organized and structured according to what Publishers were willing to provide.  Advertisers had to start working with what was available, throwing more resources and time at managing the diversity that clients were demanding which made the process of managing internet advertising increasingly more expensive.

Competition for inventory rose steadily once again following the recoil of the bust and price inflation followed.  The explosion of ad networks broadened advertisers' options and the result was a drastic overload on resource requirements to manage just a single campaign.

While all of this was going on, Search outpaced display as advertisers began to recognize the value of response-based advertising and Google's climb to the top of Everest was off to the races.

Fast-forward to the beginning of 2008 and you had topped-off CPMs, somewhere between 200 and 400 ad networks (depending on who is counting) and Google controlling 60+ % of the addressable Query stream on the Internet – 90% collectively controlled by Google, Yahoo and MSN. 

Throughout the first-half of 2008, prices hit all time highs in search as traffic growth online slowed and competition for popular keywords rose.  CPMs for targeted quality display inventory trumped the last four years and publishers began to push to reclaim inventory from the networks that had been previously aggregating and watering down their value.

Then the big ball started to swing.  With the advertiser no longer able to increase spend in search without compromising ROI and publishers reclaiming display inventory in order to elevate CPMs, something had to change.  Additional factors at play, aggravating the situation, was the continued consolidation of search (think Google’s increasing share of the Market – the Yahoo deal, Google running on ASK, etc.), the intense-resource demand on advertisers associated with managing disparate data sources, and publishers trying to push CPMs while a massive number of networks commoditize eyeballs. All of this equates to the advertisers almost hitting a breaking point.

Then the economy took a swinging nose-dive and everyone started to run around asking themselves what is the fall-out result for online advertising.  Is this the next bust?  Here come the layoffs.  How many VC-backed companies are going to go under which have promised huge returns with no revenues to prove it?  One thing that is for certain, Advertisers are aggressively taking back control over their spend.

You can figure there will be 15% cuts in budgets across the board in Q4.  At least that is what some of the larger advertisers are talking about and that is what some of the networks are already hearing.  The place where those cuts are starting is anyplace where an ROI can’t directly be derived.  Lookout publishers – if you can’t prove a return you’re going to lose spend. 

Response-based advertising is probably the most insulated area of the industry over the next 2 to 4 quarters given our economic environment.  Advertisers have to advertise to keep generating business, but branding online is going to suffer.  This means a push from CPM towards CPC and CPA, even for display.  Advertisers will be driving the pricing models and publishers will have to buckle in order to sell inventory. 

Furthermore, diversification of spend across less expensive, higher-returning publishers and networks will also draw attention.  This means that advertisers who have hit the asymptote of their returns on Google or the major display ad networks – when spending a dollar no longer returns $1.50 but now returns $1.25 – will start to look elsewhere to maintain their margins.  With smaller budgets to spend, ROI pressure will become intense.  We may even begin to see performance-based commissions between advertisers and agencies as competition for control over the spend increases between agencies.  Certainly this will be a likely case in the SEM arena.

So the pendulum, which started to swing in the beginning of Q2, went full tilt when the market dove.  Advertisers now hold the cards and publishers and networks that recognize the truth will step up and work with them to maximize the value of their relationships given the pressures present in the economy. 

With less money to spend, more pressure to perform, hundreds of publishers and networks competing for the reduced dollars at hand…advantage advertisers.

A mediated exchanged between buyers and sellers for the exchange of advertising inventory is not a new concept.  Right Media is the best example of a well-executed version of this concept.  I commented on Right Media several weeks back in Disintermediating Ad Exchanges, Publisher Ad Auctions.  The argument back then was that in an ad exchange environment like a Right Media, where buyer and seller are brought together anonymously under an auction based environment, there is no relationship developed or fostered in the buy process.  My proposal hypothetical question in that article was, what if you could eliminate the middle-man of the exchange and put buyer and seller together.

That article generated a response from Right Media.  Bennett Zucker contacted me for a little education conversation.  Subsequently, I wrote a follow-up comment acknowledging the value proposition of Right Media.

Some of the things that I learned my research into RM and other exchange models is that publishers are migrating away from the traditional networks because they are getting better rates through the exchanges.  Inside sources have shared with me that Advertising.com, Tribal, Burst and other popular networks have all seen a measured decrease in publisher inventory while that same inventory has reportedly shown up on RM.

So now DoubleClick is going to enter the exchange game.  Think back a while and recall that DC was one of the original networks.  Of course I don’t believe there is a single person remaining at DC who was involved in that operation, but the heritage is there – and maybe some of the legacy technology.  Regardless, they’ve built the exchange technology.  They have the publishers with DFP and they have the advertisers with DFA.  Put them together and link the two systems and you have a broad network of exchange.  Get out of the way and you potentially have a model that will rival Google’s cake-and-eat-it-too mode of AdSense and Adwords.

DC has some challenges ahead of them.  I don’t know the nuances of how well they are going to tie together DFP and DFA, but as hosted solutions they can upgrade and link the two and the users will see the collaborative efforts.  If publishers start pushing inventory into the system and advertisers start looking into the system to buy, you have a strong value proposition for both sides of the transaction.  Under this model, neither buyer nor seller needs to go to a different system like a Right Media to transact. 

Under the DoubleClick exchange, it is largely publisher inventory that is at stake, whereas with Right Media is mostly network inventory.  So will advertisers who use DART start to look at the exchange for publisher inventory – or will publishers first begin to test the DC exchange in addition to “offshoring” inventory to networks and auctions?  Time will tell and the testing model of DC will be a good approach so the top-success-oriented players demonstrate the desired results.  But this is one to watch closely as it could be game-changing.

Reactionary with Insight

Steve talks about customer segmentation based on demographic and psychographic profiling.  Of course you can push this farther and consider buying habits, product preferences and other known store-interaction behaviors which can be categorized.  Anything you know about your customers can be grouped and segmented.  So while Steve talks about the anonymous segments, when we’re talking about customers we can dive deeper and look at the information that our eCRM systems can capture and that our site-side analytics can measure.  If I have a customer who purchases monthly, like electronics (i.e., Target.com) and spends on average over $100 per transaction, I can drop that user in a bucket with other like-demographic customers.  The segmentation possibilities go much deeper.

This is not to suggest paralysis of analysis by creating too many segments, however if you are a Target.com, a BestBuy or other big box retailer, you have many, many customers and you have the ability to create 10-20-30 customer segment groups.  If you are an e-tailor like LLBean, or Amazon or Overstock.com, you can create these segments.

Steve talks about Personas, as a defined “who or what,” meaning “…Why does this product or service make sense to your target audience? Why do the people represented in this audience need it, and why will they use it? How should we structure and design it to satisfy how people will be using it? How do we make sure the site gives people the experience they need and the business results we need?” 

In Steve’s discussion, Personas are the other side of the equation, the behaviors that you target or goals.  This article focuses on web site content placement which is vital to the emarketing equation.  How you react to your customers when they are identified on your site will directly correlate to your recurring revenue potential.  I have discussed the integration of CMS and dynamic content many times before.

When someone logs-on an identifies themselves, you tap into eCRM and you can tap into the segment relationship and/or bucket that user belongs to.  They you can target them with content and messages to promote recurring revenue opportunities.

External marketing, such as email marketing can tap into these buckets as well with customer segment targeting as well.

But a topic we have talked about many times before is how you can recognize and target someone BEFORE they come to your site and identify themselves.  Well, what about when they come to your site and don’t login.  Using cookies enables you to recognize someone and still tap into your customer segment models right?  So you don’t have to wait until they login to identify them.

That takes care of returning customers.  What about someone who blows out their cookie?  Well, as soon as they login you can re-recognize them and re-cookie them right?  Cool.

What about someone new?  They click on an ad and come to your site, you grab the click-thru URL and interpret the source and put that into the cookie as a prospect and let CMS take over until they create an account.  Cool.  Once they become a customer, segment membership begins and more data can be written to the cookie for future recognition and content targeting – more CMS.  CMS is Content Management System btw.

Then there is the external recognition of your customers – what about the topic of choice with regard to advertising.  If you are spending time creating customer segments and you are spending time creating goals for CMS targeting.  Why wouldn’t you leverage that knowledge to benefit from being able to recognize your customers when you advertise online as well?  If you can recognize your customers while you advertise online, you can extend your goal-oriented messages, drive recurring revenue opportunities and motivate your customers to return.  When they do, your site-side BT efforts can take over as Steve discusses and your drive home those sales opportunities.

With both of these efforts in place.  Taking the time to create and analyze your customers to create segments and creating targeting goals that affect both internal, site-side and external, advertising-side efforts you will gain huge insight into what works.  The knowledge gained will improve your ability to make better decisions about your future marketing efforts, both site-side and external.

Reactionary with Insight

Several years ago people screamed about the use of cookies: “VIOLATION OF PERSONAL PRIVACY!”  The industry cried that we must educate the population so that they realize that cookies are not bad, spyware is bad.  Antispyware came out, and adware came out.  People now feel protected from persistent spyware and third-party cookies now get deleted 45% of the time.  The dust cleared from the cookie fight and yet cookies are still in common practice.  The funny part is that people still don’t understand cookies.  But the industry has moved on; it has stopped trying to educate and now the next crisis has moved to the forefront – behavioral targeting.

BT still involves the use of cookies but the technology is less of the issue.  It is the overall concept of tracking and oversight that people care about.  Once again there are those in the industry that are trying to educate, but then there are many of us that know that you can’t educate people coming from a position of fear.  Moreover, once politicians get involved it’s about swaying popular opinion and not about providing rational explanations.  Remember that some people get charged by the fight while others stay in the background, continuing to develop and position their cards so that they are ready when the dust clears.  A new crisis always moves to the forefront to replace the existing one, right?  Where will you be when that happens?  Battle scared or primed?

Is it ethical to behaviorally target?  Is the internet really free?  Is it ethical to target consumer behaviors like catalogers do?  Doug has a fair argument when he says we probably won’t even care by the time the technology is mainstream.  Right now there is kickback on behavioral targeting, but that doesn’t stop publishers and networks from offering it or from advertisers from buying it.

So where are the ethical lines in all of this?  Publishers use site-side analytics to track your patterned behavior while you are on their site.  It is their site.  You use much of it for free.  So is it ethical?  Is it okay for Safeway or Kroger to track your shopping habits in the supermarket?  You get discounts for using that shopper’s card that also tracks your behavior.  What about Amazon keeping track of your book-buying preferences?  You get recommendations right?  You get benefits in return for providing information about yourself, even online.  So where is the difference between what we have come to accept offline and what we protest online?

Why do people get so crazy about the web?  The point of the whole thing is to put advertisements that are more relevant in front of you.  Contextual advertising has done a great job at this and nobody seems to complain about that.  In fact a lot of people don’t even know that the links along the side of the Google and Yahoo pages are paid listings, nor would they necessarily care since they are usually relevant links that often lead to qualified destinations.  Relevance.  If Behavioral targeting has the ability to present a user with advertisements that are relevant, is there still an ethical violation? 

P-ersonal I-dentifiable I-nformation (PII) is the red line that can’t be crossed and yet it is crossed all the time in the offline realm.  I think that in the end it’s not a question of ethics.  It’s a question of fear.  The futuristic movies like the Minority Report scare people.  They don’t get it and other people take advantage of it to promote their own agendas (like politicians looking for platforms).

 Customer re-targeting introduces the ability to recognize customers – not anonymous individuals – anywhere on the web in real-time using first party ad serving.  Advertisers can recognize their existing customers, not based on events but based on customer profiles.  This is identical to what already goes on in the offline world.  A different message can be positioned to a customer than to a non-customer based on customer profiles – not based on event-based behaviors.  Is this a violation of privacy?  We can go around and around on this one, like we did with the cookie.  And it is the cookie battle that leads me to believe that the smoke will clear before we settle it.  When the next technical invasion comes to the forefront it too will shadow this one.  Maybe it’ll be iTV, which will be more invasive and wider-spread when it hits people while they are relaxing in their living rooms! 

You can go down the ethical rabbit hole if you want with behavioral targeting, just like you can jump into the political debate or stand up on the soap box and try to educate.  But frankly, people will continue to develop and drive forward with anonymous event-based targeting, customer re-targeting, site-side analytics and first party applications that empower advertisers to message to users with the most relevant information, advertisements and content.  Operating as if the dust will clear as oppose to getting caught up in the fight makes more sense.  Helping the web to become an increasingly more efficient use of people’s time with behavioral targeting techniques is not a violation of privacy, it is a provision of relevance.

Reactionary with Insight