Google-Yahoo! Ad Pact Hurts the Little Guy


When two bitter rivals start cozying up, you have to get suspicious. Heartwarming as it may be to see big tech companies working together, small businesses may be the big losers in a proposed partnership between Google (STOCK QUOTE: GOOG) and Yahoo! (STOCK QUOTE: YHOO)

Desperate to avoid a sale to Microsoft (STOCK QUOTE: MSFT), Yahoo! has been grabbing any opportunity to increase revenue and shore up its free-falling stock price. In June, the company announced a deal that would allow Google to sell ads on Yahoo! sites. Together, Google and Yahoo! sell more than 80% of all U.S. search ads, the most profitable part of the online ad business.

The partnership is being promoted as a convenience to advertisers. In one transaction, businesses will be able to buy ads on everything from Google's search pages to Yahoo!'s email pages, allowing their message to be seen by many more people with no extra effort.

The downside? Google, already dominant in online advertising, edges that much closer to being a monopoly. That's why the Justice Department has been reviewing the deal since it was announced in June.

And it explains why this week, advertisers started speaking out against the partnership. The Association of National Advertisers, a trade group that represents many Fortune 500 companies, demanded the Justice Department block the deal, saying it would raise prices and concentrate ad-buying power in too few hands.

If biggies such as Wal-Mart (STOCK QUOTE: WMT) and Johnson & Johnson (STOCK QUOTE: JNJ) are worried about Google's power over online advertising, the situation is even more dire for small businesses.

Online marketing used to be a place where smaller, niche businesses could compete against the big guys. While major corporations poured their ad dollars into TV and splashy magazine spreads, a small business could afford to buy ads targeted to specific Internet searches, reaching the customers it wanted at a relatively affordable price.

That's no longer the case, says marketing strategist Denise Shiffman, founder and principal of Venture Essentials and author of The Age of Engage. "If we can only buy ads from Google across most of the major publishing platforms, Google has a great deal of power in setting the price, rather than the market setting the price," she says. "Small business will get hurt the most, because they need their dollar to go the furthest."

Google prides itself on its auction-based pricing for ads: You pay a certain amount per keyword, shelling out more for the most popular words. In part, small businesses are being hurt by large corporations that can afford to buy up the most popular search terms. Indeed, because all pricing is done through an automated system, Google and Yahoo! have argued that neither company can set prices.

But Shiffman points out that there are other ways for Google to raise profits. "Google takes a percentage of every ad clicked on, as do all paid search vendors," she says. "At any time, Google can change that percentage and take more from advertisers. This definitely would hurt small companies, which would earn less from their ad click-throughs."

The Google automated system also makes it harder for small companies to make deals in exchange for ads, a crucial way businesses without big marketing budgets to stretch their ad dollars.

Because automated ad sales don't allow for more personalized marketing agreements, small businesses have no choice but to compete against the big guys for keywords, almost always a losing battle.

Even if the Google-Yahoo! deal doesn't go through, Google will still control the vast amount of online ads. That means small businesses have to think creatively, bidding on keywords that are less popular but which still target the right customers.

Small-business owners ought to do their homework, analyzing where ads appear and are most successful. Then refine the approach.

Whether Google ends up gouging more profits out of small businesses, online ads are a necessity for many companies. So you'd better make sure they're actually leading to sales.

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