Is Yahoo's glut Google's opportunity?

The dismal is on Yahoo after it announced a 20 percent increase in revenue compared to the previous year's quarter. Google, expected to grab as much as 25 percent of the online ad market in the quarter is succeeding by doing one thing that Yahoo hasn't on its "on-network" properties: Treating individual ad placements differently through its auction-based ad inventory system.

Yahoo's business is increasingly like that of a television network. It invests in content and community offerings that can be sold to advertisers on theSocial media inventory is "non-premium" only if you treat it all the same. basis of what still looks a lot like a newspaper or network rate card. This means advertisers are constantly comparing their costs at Yahoo properties to other placements, and with a growing tide of social networks where people are spending vast amounts of time and viewing hundreds of pages and messages a day Yahoo's properties look expensive.

That's not entirely a bad thing. As Susan Decker, Yahoo's CFO explained:

As we expected, our revenue continued to grow faster on our O&O sites than on our off-network sites in Q3, due to our leading position in growth in the graphical ad market. Our O&O sites were up more than 20% year over year in aggregate, led by graphical, where our top 200 U.S. advertisers grew between 30% and 35% year over year.

Advertisers that like the Yahoo properties spend more to keep their messages prominently placed. However, Yahoo's "off-network" ad inventory is suffering because those placements don't come with the premium commanded by Yahoo's brand. Even with the launch of Yahoo's new Panama ad platform for its ad serving service, the value of its off-network properties will be stuck competing with Google's ad network for the lowest cost for performance. 

During the conference call yesterday (here's the transcript), Yahoo COO Dan Rosensweig referred to the market experiencing a "glut" of inventory, then went on to disparage the inventory in social networking:

I think what we are referring to is you see a whole proliferation of a lot of inventory in sort of the lower end of the non-premium range. A lot of the social media stuff, a lot of the network stuff that is being created, a lot of the ad networks are able to serve it. That is really focused on the low-end of the people who are not interested in the environments that they are in. They are simply interested in a specific performance ratio.

Au contraire, Dan. Social networks are exactly the place where advertisers will be most interested in the context and value of a placement, because they will pay substantially more for some clicks than others because they lead to better customer conversion rates and higher reveneues. Google has mastered this market simply by recognizing it is irrelevant that Google's brand or Google's content (which it, too, is buying up in the form of "user-generated" sites, like YouTube or in long-term deals to place ads on MySpace) is involved in the transaction.

This inventory "non-premium" if you treat it all the same. Value comes from treating it as highly differentiated inventory.

The important thing from Google's perspective is that a specific transaction is involved. Its ad inventory auction system takes care of the pricing, treating some clicks as "more equal," or more valuable, than others. Google's acquisitions, in particular, demonstrate its understanding of the amorphous value of a brand--they leave each acquisition's brand alone for the most part and simply shove AdWords ads in.

Yahoo cannot invest its way into that market without acknowledging that its quasi-studio model, which depends on creating lots of Yahoo-branded this-and-that sites, is an inefficient approach to competing for off-network inventory. Panama may make a difference by bringing more inventory into existing large advertisers budgets under their Yahoo relationships, but most inventory will still go elsewhere.

So, is all this bad news for Yahoo? Not exactly. The "owned-and-operated" Yahoo sites, where its brand has created a premium, is still a rich vein for ad revenue that Google, with its non-branded approach to content can't compete with. That's where Yahoo needs to concentrate, on wringing the most value out of well-made Yahoo-branded content. It may continue to buy or build social networking sites, but those will always come at a premium price or success will result from placing lots of expensive bets—as Google's $1.65 billion YouTube acqusition proves.

Google still stands to gain much more of the unbranded or other-branded inventory that is exploding across the Net. That glut may drive down overall prices for inventory, but it is full of high-value clicks that make profits at Google surge.