Yahoo is going to start using Google AdWords to monetize 3% of searches. Which searches are they picking? What would be the best strategy for Yahoo and Google? Read on...
Yahoo and Google are now temporary bedfellows. Yahoo used to get search results from Google until 2004-2005. Yahoo has been off the Google search IV for awhile.
Flip forward to 2008. Yahoo is getting crushed by Google on search. They're pretty much the AOL 2.0 of Web 2.0 on search (they still rock on a bunch of content properties). Search is a hard problem, Google has won for now on web search. Google's leadership in search has led it to collect an incredible lead on the search monetization front as well. Adwords is a far more powerful system than Yahoo's competition. The analytic tools, keyword limits, and bidding, all points are to Google. Also, Google has more partners than Yahoo: AOL, Ask, MySpace, etc...
All these factors give Google more advertisers to draw from when picking ads. This is a critical factor for monetization of search. Having more advertisers sometimes leads to having more coverage--which is the number of searches with ads divided by the number of total searches, a higher percentage means you show more ads on more searches. Also, the increased competition of having more advertisers in an auction generates more money as well. For example, if you have 1000 flowers shops on Google competing for Mother's Day related keywords versus Yahoo's 100 flower advertisers; Google is probably going to generate more revenue per search, since more people are bidding for spots in the search results. Google also has the advantage that they control the US market share so some advertisers will only sign up for Google, leading to more advertisers on Google than on Yahoo.
The Yahoo/Google deal solves the Yahoo problem of being sold for far too little. By proving Yahoo is worth 20-50% more than the Microsoft bid, they might end up preserving their independence; if that is their goal. Regardless this test will force Microsoft to pony up more money because Google's ads will show how much Yahoo could potentially be worth.
Lets assume for a second that Yahoo doesn't want to be purchased by Microsoft. They don't want to kill the morale of their employees on Panama (the Yahoo adwords). On the Google end, they're probably worried about the perception of having all search traffic in the US. Google would certainly become a bigger target for the government. If Google and Yahoo are looking for a longer term approach to this 3% test, the best idea is to NOT show ads to a random set of queries.
A much smarter idea would be to target the head of revenue generating queries from Yahoo's traffic. Google could end up boosting earnings by a good chunk just by monetizing a small sliver of Yahoo's traffic. This solves Google's scrutiny problem, and Yahoo's morale problem as well.
Lets walk through a hypothetical and assume only 30% of searches on Yahoo are monetizable. Of those assume a small amount 20% (from the 80/20 rule) generate 80% of revenue. That would mean that only 6% of searches generate 80% of revenue for Yahoo. So by doing this 3% test they might effecting 40% of revenue for Yahoo. Pretty amazing, definitely a smart move if this is really happening.
Full disclosure: I used to be a software engineer at work at Google on the AdSense and AdWords products (2003-2007). I now work at Yelp as a software engineer on search.