Yahoo's Marissa Mayer's big challenge: Fix the ad technology stack

Should Yahoo outsource its display advertising technology stack? Here's a look at the risks, rewards and big decisions ahead for new CEO Marissa Mayer.
Written by Larry Dignan, Contributor

Yahoo's move to hire former Google executive Marissa Mayer as CEO adds engineering chops to a company that has never quite been able to figure out whether it's a tech or media outfit. The good thing for Yahoo is that Mayer's tech background may be able to sort out questions about the company's ad platform.

In other words, what Mayer may lack in Madison Avenue chops she may offset with better ad yields and more efficiency.

For Yahoo, the ad technology stack is similar to what the enterprise planning systems are to consumer product goods companies. These systems are the backbone of the company. Needless to say, implementations can also be high-risk if botched.

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On the surface, Mayer's big decision revolves around Yahoo's partnership with Microsoft's Bing. Yahoo uses Bing for search and Microsoft's platform for search advertising. The catch is that revenue per search (RPS) hasn't played out the way both parties expected.

In the fourth quarter, Microsoft extended its revenue per search guarantees until March 2013 to bridge Yahoo's losses related to technology transitions.

Yahoo also cites the Microsoft search partnership as a key risk. Yahoo said in its latest quarterly regulatory filing:

If Microsoft fails to perform as required under the Search Agreement for any reason or suffers service level interruptions or other performance issues (including if Microsoft is unable to effectively monetize search queries in markets where paid search has transitioned under the Search Agreement), or if advertisers, Affiliates, or users are less satisfied than expected with the services provided or results obtained after transition or during the period prior to the transition of search to Microsoft in their respective markets, we may not realize the anticipated benefits of the Search Agreement, we may lose advertisers, publishers and Affiliates, we may lose exclusivity with certain publishers, and our search revenue or our profitability could decline. To the extent the RPS Guarantee payments we receive do not fully offset any shortfall relating to revenue per search in transitioned markets or if our revenue per search upon expiration of the RPS Guarantee payments is lower than the guarantee levels, our search revenue or our profitability could decline.

Mayer's obvious tech decision revolves around Yahoo's search deal. Can Yahoo get out of a 10-year deal to use Microsoft's search and ad technology? A move to Google would raise regulatory eyebrows and may be more trouble than it’s worth.

Simply put, Mayer can live with Microsoft for a bit because she'll have a bigger tech fish to fry. In the first quarter, search accounted for 38 percent of Yahoo's revenue. Display advertising was 42 percent of the sales pie.

Yahoo's future largely depends on its display advertising and the company will need far more than Madison Avenue chops to grow the business. Yahoo needs liquidity in the display ad market and needs to make a call on whether it builds up its existing technology assets or outsources.

In a detailed report, Evercore Partners analysts Ken Sena and Andrew McNellis walked through Yahoo's ad technology stack. Yahoo has hired former AdMeld CEO and Google executive Michael Barrett and now has Mayer. The moves signal that Yahoo is going to get serious about its tech assets and the challenges ahead.

Add it up and Yahoo needs better technology to support its class 1 direct display advertising as well as class 2, which is remnant. Should Yahoo build up its ad tech or outsource. Evercore's analysts explain in a research note:

Ad technology headwinds include a lack of demand-side platform and real-time bidding capabilities and shrinking class 2 inventories relative to faster growing platforms (e.g., Google, AppNexus), which, longer-term stand to pressure yield. Financially, we estimate the potential for $275 million from the elimination of nearly 1,000 ad tech staffers, in addition to potentially higher yield through better real-time optimization of its Class 1 and Class 2 inventories.

Specifically, Yahoo has two primary display ad platforms. First it has Right Media and then a concoction called APT. Yahoo's decision on ad tech could go either way. In the build camp, there's the argument that Yahoo has the most premium display inventory. The catch is that Yahoo is behind on the ad tech front. Outsourcing could be a good option financially, but Yahoo needs to hold onto its customer data.

Sena and McNellis said:

From an ad technology standpoint, Yahoo has fallen behind. One explanation for this is that Yahoo’s ad tech history moved off course as it spent years attempting to optimize the purchase of search and display advertising through one insertion order (a.k.a., Project Panama), which ultimately proved unsuccessful. Moreover, although it acquired the leading display exchange platform, its lack of investment in demand-side optimization tools has led advertisers to optimize Yahoo’s inventory through other sources.

Like every company Yahoo's outsourcing decision won't be easy. If Yahoo keeps its own tech stack it can optimize ads better. However, Yahoo's ad technology could suffer from a lack of liquidity. Like any market, you need liquidity to be viable. If Yahoo outsourced it could see better yields, retain control in exchange for bringing more inventory to market and stay up to date on technology.

Evercore breaks down Yahoo's options like this:


The catch is that swapping out display ad platforms has plenty of risks. The technology hurdles via Evercore include:

  • Find replacement ad servers with scale and technology.
  • Retag all ad slots.
  • Migrate remnant inventory to a new market.
  • Replace order management and creative tools.

Financially, Evercore estimates that Yahoo could save $275 million by outsourcing. Most of those savings are related to the headcount supporting Right Media, APT and legacy ad systems. If ad yields improve, Yahoo can drive revenue growth too.

Should Yahoo go the outsourcing route Mayer will still have to tackle this never-ending question: What does Yahoo do exactly? If it outsources its ad technology Yahoo can't claim it’s a technology based outfit. Is it possible that Mayer, an engineering type, could make the call that definitively makes Yahoo a media company?

Time will tell, but this ad stack decision may go a long way toward defining Yahoo.

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