Yahoo will launch its long anticipated Panama ad serving system today. The Panama system is similar to Google's AdSense and Microsoft's AdCenter. The key improvement is that ads will be placed based on expected Click Through rates (CTR) and revenue yield, instead of just placing the highest bid ad at the top. Google and Microsoft figured out a long time ago that the highest bid ad may not attract the most clicks or generate the most revenue for Google.
The New York Times says;
Just about everyone inside and outside Yahoo expects the system to generate more revenue for the company, but no one knows exactly how much more. Last month, Yahoo cautioned investors not to expect the financial impact of Panama to show up until the second half of the year.
That is in part because as the system is introduced, some advertisers will end up paying less and some more for each click, as ads vary in how likely they are to attract a click from a searcher. Search marketing experts say that in general, the well-known brands will get better placement for their ads at lower bids, because people are more likely to click on them. The reverse will be true for lesser-known brands.
Will Panama make a huge difference for Yahoo? No, I don't think so. It will improve the revenue per search from US$.025 to maybe 4 cents. By comparison, I have seen estimates that Google gets as much as 9 to 10 cents per search.
The problem is Yahoo isn't generating enough search traffic. Most of Yahoo's traffic comes from Yahoo Mail (33%) and Home page visits (32%) , both of which can not be easily targeted because there is no user indication of interest like a search keyword. Yahoo generates less than 11% of its traffic from search while Google 88% from search.
Further, Google is generating more revenue with fewer ads per search. Google CEO Eric Schmidt said the company was placing fewer ads in front of users, yet receiving more clicks. More clicks equals more revenue, and fewer ads equals a better user experince.
See this chart from "Why Yahoo's Panama won't be enough" that illustrates the difference in traffic at Yahoo and Google. 
Danny Sullivan's SearchEngineLand provides some more detail about how the Panama system works. I remember back in my AltaVista days when we changed our algorithm to mimic Google's PageRank system. We used all the same attributes to rank relevance, but the secret sauce is in how much weight you give to each one.
Algorithms are like a recipe for for cheesecake...they may have all the same ingredients but they sure can taste and look very different. Its all in the cook's secret technique...not the ingredients. Does Yahoo have a winner here? To continue the cooking analogy...The proof is in the pudding.
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last time i checked yahoo had ~29% of the search market, so while it can and should deliver more search traffic not sure it is accurate to say that they don't have enough. They have plenty of traffic that they need to do a better job of monetizing.
Posted by: as | February 05, 2007 at 12:06 PM
The sponsored links are not limited to search, and get shown on other Yahoo! properties, like a news story here
http://news.yahoo.com/s/ap/20070205/ap_on_hi_te/advertising_alternative;_ylt=AujcPOIPDBpcccBQC.o9RWMjtBAF;_ylu=X3oDMTA2Z2szazkxBHNlYwN0bQ--
While you might not see immediate monetization of Mail, improved numbers of Search, News, Finance and other properties should boost the income across the board.
Posted by: Alex Moskalyuk | February 05, 2007 at 01:45 PM
Don, Noooooo! I just bet a kilobuck this will jump start YHOO's share price!
Several good points, but why so pessimistic about the conversion on clicks at .04? Google search and Yahoo are now functionally equivalent with MSN and ASK close, but Google is *perceived* as better . Important, but won't this perception erode over time, giving great share to the competition?
Posted by: Joe Duck | February 05, 2007 at 02:30 PM
Joe, if you are talking about Panama's impact on Yahoo's stock price than you may be right. The stock market marches to the beat of a different drum. Panama will certainly add a few percentage points to their bottom line and that will probably drive the stock price. On the other hand, Google just reported a block buster 4th quarter and the stock dropped $30, so go figure.
Advertisers and consumers tend to jump on the bandwagon of the market leader. That leadership position and brand image is very difficult to overcome. Better technology is not enough to swing advertisers and consumers, and I don't think Yahoo's technology is better than Google's or Microsoft's.
Alex, it is true that ads can be somewhat targeted based on news stories, finance stories, or even email, but not with the precision and effectiveness that search results pages can. It is a very subtle but powerful difference.
Users will say Google is better but they usually can't articulate why. Is it speed, relevance, clean design, fresher results, fewer ads? Probably some combination of all of these but it is not obvious which factors carry more weight.
Posted by: DonDodge | February 05, 2007 at 03:46 PM
Thx Don. I'm cool, my 1k in calls are up $600 after today.
Posted by: Joe Duck | February 06, 2007 at 04:27 PM
I have a hypothesis and would like your comment on it.
Pre-Panama launch, Yahoo had a system which would give most importance to the bidding amount by the advertisier and one with highest bidding would be placed highest in the search results.
It would then make sense for advertisiers who were not too admired by the users(based on CTR) to pay a higher price and be ranked at top in Yahoo search? I would assume such customers as the traitional customers of Yahoo.
Now with Yahoo going the google way with Panama, the highest 'expected revenue' generator add will be placed at top. Thus going by my hypothesis the traditional advertisiers of Yahoo will feel alienated and this could adversely effect the business of Yahoo!
Posted by: Biplav Misra | February 11, 2007 at 04:14 AM
I think it is more likely that Yahoo's existing advertisers will modify their ads and landing pages to get a higher quality rank and CTR (Click Through Rate) at Yahoo.
Some may be alienated and leave, but I think most will adapt to the new system.
Advertisers and users are pretty loyal, or perhaps resistant to change. This is true for all companies and services. It takes a lot to get anyone to change their behavior or patterns.
Posted by: Don Dodge | February 11, 2007 at 10:02 AM