‘Microsoft puts it on the line and ups the ante to $33 per share in the bid for Yahoo; the initial offer of $31 per share has peeked the interest of investors and results in Yahoo’s acceptance’ â€“ that is what I predict will be the headline in the near future.
For those of you that don’t quite understand the wild growth of Google stock, let me explain it simple terms. Let me also explain why Microsoft’s has Google’s full attention right now and why this buyout is so important to Microsoft.
Adsense and how your neighbor is getting rich
Google has an advertising program, adwords and adsense. If you own a business, then you can use adwords to design your own ad. This ad will appear on Google sites and websites owned by individuals and companies around the world. Google tells you what you’ll have to pay if someone clicks your ad (it’s a suggestion, but if you don’t run with that suggestion, your ad may not even appear).
Adsense allows owners of websites to place a piece of code on their site. This code runs when someone views a webpage and retrieves ads from Google. Google decides which ads will appear on your site.
Google may charge a plastic surgeon $10.00 per click to take out an ad that will appear on the internet (good deal considering the plastic surgeon obtains one new customer for every 10 clicks). The owner of a website with information about plastic surgery may receive $2 for the click, not bad considering the website gets 100 clicks per day.
The surgeon who took out the ad (adwords) received 10 new customers averaging $5,000 in business per client for a total of $50,000 and only spent $1,000.
Yearly profit for Surgeon: $17,885,000!
The website owner who stays at home and writes articles about plastic surgery, makes $200 per day.
Yearly profit for website owner: $73,000
Google, who charged the surgeon $10 for each ad that appeared (and was clicked) on the website about plastic surgery and gave the website owner $2 for the same click, made 8$ per click.
Yearly profit for Google is $292,000
Crazy, isn’t it â€“ everybody wins (and this is just one site in a sea of millions that Google is making money on!).
Google puts a stop to Yahoo, dominates internet advertising
The scenario above was when Google first started their adsense program. Yahoo entered the advertising game late, but did so by offering the surgeon the same ad for $9 ( rather than $10) and the website owner $3 per click (rather than $2).
Google has a lot going for them, they were first, they have ad delivery down to a fine art and a very large advertiser base.
Google retaliates against Yahoo by cutting the cost of the ad for the surgeon to $8.75 and paying the website owner $3.10. The race is on and in the end, Yahoo is driven down to a price that can’t compete with Google. To this day, Google, on average, pays better than Yahoo.
Google’s quarterly profits downward decline?
The shareholders still expect their profits to increase and Google needs to report higher earnings even though they are making less. They decide to pay the webmaster less per click so that they can report higher earnings next quarter.
Today, webmasters are making just a fraction of what they were when this all started. The surgeon is still paying $8.75 per ad, but the website owner is down to .50 per click from $3.10. The website owner can’t really complain, $18,250 for running a website isn’t all that bad.
There are limits to the amount Google can take before website owners decide to find other means to monetize their website and for many, that limit has been reached.
Yahoo, beat down from the race with Google, is suffering, it needs something new. They can’t compete with Google alone and Microsoft has the backing that Yahoo needs to succeed.
Can Yahoo Survive the Internet Advertising War?
Yahoo has all the components to stand head to head with Google, so why are they so far behind? It all comes down to ad targeting! When Google displays an ad on a website, it reads the webpage content that the ad sits on and comes up with a targeted ad; this is called contextual advertising.
If you have a website on the risks of plastic surgery, Googleâ€™s code looks for advertisers dealing with reconstructive surgery. If your website is about Kiteboarding, then youâ€™ll find Google show advertisements from companies selling Airfoils and related equipment.
Googleâ€™s ability to match an Ad with a webpage is amazing! Yahoo on the other hand, does a poor job in many areas. If the ads are not targeted (donâ€™t match the sites content), then people are less likely to click the ad; end result, website owners makes less, advertisers (like the surgeon) make less and people move back to Google.
Matching ads to content is the key to Yahooâ€™s success! Yahoo doesnâ€™t have the advertiser base that Google does and therefore, canâ€™t cover as many areas as Google can; however, inject Microsoftâ€™s advertiser base into the mix, and ad targeting will have the accuracy needed to succeed!
The Winner in the Coming Ad War is Clear!
Microsoft needs Yahoo’s advertising program and Yahoo needs Microsoft money and resources. If Microsoft is successful, then the end result will result in another ad pricing war where one winner will emerge.
The search engine that is willing to pay website owners more and accept less in profits will obtain most of the webmasters. Microsoft has a large product base while Google’s profits come from internet advertising. Take away the money made from internet advertising and Microsoft can still survive, the question is, can Google?
Google will do what they can to keep website owners from jumping camp, and that means paying more per click. Microsoft, knowing that website owners have seen their profits decline, will offer payouts that are too good to pass up. In the end, the winner will be those of you who own websites.
The seed has been planted, change will happen, the only question is, are you ready?