Yahoo and the newspapers: A recipe for decreased costs and rising revenue

Yahoo's deal with 176 newspapers to partner on local and regional advertising efforts is a smart move for a company that was facing escalating content costs. In a relationship with the papers, Yahoo has fewer upfront costs and can even rely on getting more traffic from Google as part of the deal.

Yahoo is acting like a media company, again, and it's a good thing, too. A deal between Yahoo and a consortium of 176 newspapers, announced today, to use local news as a foundation for local paid search and display advertising is a smart move for a company that had been floundering in the wake of Google' virtually cost-free access to content. I just finished writing the first of several research reports on local advertising for The Kelsey Group (see the summary of the report on real estate advertising here) and believe Yahoo addressed a key problem, summarized in the report:

As the local online service market fragments more — an inevitable consequence of the proliferation of services aimed at the city and neighborhoods — Yahoo! faces rising costs of customer acquisition without a guaranteed return on investment. Google’s costs of customer acquisition will be lower than Yahoo!’s because it does not need to pay for content or contextualizing data up front — sellers and brokerages simply give it data, which generates paid search revenues.  

With this deal, which includes papers owned by seven newspaper companies, Yahoo has cracked a key content cost that can help it substantially differentiate its advertising offering from Google's. For Yahoo is a media company that depends, like traditional media companies, on the assets it can collect to tell the story of a marketplace. Google, by contrast, is a media company with no content assets that, if Yahoo plays its cards right, will drive traffic to a fierce competitor when the content is the most relevant and useful to customers. 

The newspaper companies are going to continue to produce news and local information, even if they do more to assemble citizen journalism along the way, shouldering much of the cost of information that contextualizes local purchases, such as real estate, automobiles, and other services, like job listings. It's their gig, the natural place in the food chain for them. Yahoo's role, providing advertising and an environment for digital packaging of news content that blends data from many sources, is expensive enough without hiring reporters and researchers. All in all, this is a fair division of labor.

One doesn't move to a city or take a job at a company that can't be researched online—now Yahoo has a reliable and quasi-exclusive source of that information that doesn't cost it so much upfront. I use the term "quasi-exclusive" to describe the content because Yahoo and the papers can be incredibly promiscuous with the pages they offer as long as clicks happen.

Financial terms weren't disclosed, but we can assume there is some form of guarantee of revenue to the papers based on a share of advertising, similar to MySpace's relationship with Google. The difference is, Yahoo was out in the cold before, facing increasing content costs to address local markets while Google had been selective about its upfront guarantees until very recently. Now, it seems, Google's doing much more speculative spending than Yahoo.

I went so far in the Kelsey Group report to suggest Yahoo acquire a local publishing company with free listings publications at grocers around the country. The ideal candidate is Primedia, which would give Yahoo a whole range of niche publications to build local and affinity relationships.

This deal with the papers solves some of the problem for which I suggested a radical solution, tying Yahoo advertising to local content at 176 newspaper sites. And, ironically, Google will happily serve ads linking to those sites for a share of revenue, so everyone's happy. But Yahoo more than Google because Yahoo has the content relationship; it may be able to carve off higher margins than simple paid search, because of cross-advertising bundling with the newspapers and Yahoo online assets.