Why Yahoo Will Never Reach The “Revenue Per Search” That Microsoft Promised

Microsoft has effectively renewed its search vows with Yahoo a second time, pledging once again that Yahoo will indeed earn a high “revenue per search” that was promised back when the alliance was made in 2009. That’s not going to happen. When the latest extension expires in a year, the expected RPS still won’t be reached. Microsoft will either renew again or Yahoo will walk away, if it can.

All About RPS

Yahoo Extends Microsoft Search Deal & Revenue Guarantees is our story on Search Engine Land today that covers how Microsoft is extending a part of its deal with Yahoo about “revenue per search” or RPS.

Don’t know what all this RPS business is about? The short story is that when the two entered into a deal in 2009, Yahoo was promised that it would earn an amount for each search that happens that was somewhat competitive with Google.

In other words, if Google was earning on average $0.40 per search (take all the searches it processes, divided by all the search revenue it makes to get that figure), then Yahoo might have been promised to get close to this with Microsoft’s help. For example, maybe Microsoft promised that Yahoo might make $0.25 per search.

We don’t know exactly what the RPS is supposed to be, because Yahoo has never revealed this. Those figures above are just examples to help explain the concept. But what we do know is that Yahoo has never met the agreed-upon RPS goal.

The Elusive RPS Goal

Each quarter, Yahoo would talk about how it was always getting closer to hitting that goal but never quite reaching it. My story from last year, As The Yahoo-Microsoft Search Alliance Falls Short, Could A Yahoo-Google Deal Emerge?, goes into depth about this.

In that story, I covered my assumption that since Yahoo wouldn’t state the actual gap, it must be pretty bad. I also listed the “progress” toward closing the gap on a quarter-by-quarter basis, based on what was said at Yahoo earnings calls.

Here’s an update on that:

  • April 2011: Unknown RPS gap used as benchmark
  • July 2011: Gap reduced 20%
  • October 2011: Gap reduced a further 10%
  • January 2012: Gap reduced 5% to 9%
  • April 2012: Gap reduced 0%
  • July 2012: Gap reduced 0%
  • October 2012: “Yahoo-driven RPS” improvements happened, but nothing specific about the gap
  • January 2013: “We are improving our own RPS” but nothing specific about the gap
  • April 2013: “Still a gap”

The last three items are notable. Under the command of new CEO Marissa Mayer, Yahoo stopped giving out any percentage of how much the gap was reduced at all. That made it harder for people like myself, investors or analysts to have any idea if the gap was being closed.

Ken Goldman

Ken Goldman

Mind The Gap, Because It’s Staying A Gap

Clearly, it was not. By April 2013, in the Q1 2013 earnings call, Yahoo still hadn’t reached the goal and worse, the gap was no longer covered by Microsoft. As Yahoo CFO Ken Goldman said:

The RPS guarantee for Microsoft lapsed in the U.S. and Canada at the end of March. There was still a gap in monetization and we will work with Microsoft to improve our search monetization.

Since then, the agreement has been extended, as today’s news covers. That should bring $45 to $100 million to Yahoo over the coming year, according to what Goldman said on the Q4 2012 call:

If you look at year-over-year, the lack of RPS guarantee is about $100 million lower revenue. Again, this is year-over-year. If you look at it now, we are improving our own RPS. So if you look at what it would have been had we continued beyond the first quarter, it’s probably more in the $45 million to $65 million rough range.

Yahoo Looks To Boost RPS On Its Own

I bolded the “we are improving our own RPS” part to emphasize how, since October 2012, Yahoo’s been dropping references in its earnings calls to its “own” RPS versus apparently a “Microsoft” RPS. That’s a further hint that Yahoo itself knows that Microsoft has no magic RPS solution here, and that Yahoo itself ultimately has to increase its search earnings.

Microsoft has two ways to increase RPS: deliver more ads to Yahoo or get more money for those ads. It clearly hasn’t done either in a way to impact RPS.

That leaves Yahoo to figure out its own RPS solutions, most notably the new cost-per-lead ads that it rolled out in December. An expanded Yahoo deal with Chitika announced today may also help, as perhaps might Yahoo’s new stream ads.

Yahoo-Google In 2014?

Perhaps over the coming year, Microsoft will find that magic solution that leads to Yahoo seeing an RPS boost. But given years now of underperformance, that doesn’t seem likely.

Instead, Microsoft has bought another year of Yahoo loyalty. Yahoo’s has received another year to figure out how to find $45-$100 million to reassure analysts who, frankly, haven’t seemed that bothered about RPS guarantees lately. And in a year, maybe, just maybe, we’ll see talk of a Yahoo-Google alliance more likely.

Postscript: The Wall Street Journal is now out with an article saying that Yahoo is trying to find a way to break its deal with Microsoft. I explore more about this, and why Yahoo can’t easily walk away, in my follow-up piece: Even If Yahoo Wants To Leave Microsoft, Here’s Why It Can’t.

Related Articles

Related Topics: Channel: Industry | Features & Analysis | Internet Marketing Industry | Microsoft: Business Issues | Top News | Yahoo: Business Issues


About The Author: is Founding Editor of Marketing Land. He’s a widely cited authority on search marketing and internet marketing issues, who has covered the space since 1996. Danny also serves as Chief Content Officer for Third Door Media, which publishes Search Engine Land and produces the SMX: Search Marketing Expo conference series. He has a personal blog called Daggle (and keeps his disclosures page there). He can be found on Facebook, Google + and microblogs on Twitter as @dannysullivan.

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  • http://twitter.com/aaronwall aaron wall

    When mentioning Yahoo!’s relative under-performance on search, it would be helpful to point out the absurd amount of their “search” traffic that was various forms of arbitrage. Part of the reason (likely the primary reason) Yahoo! took such a sharp nose dive in terms of search revenues was that Microsoft used quality scores to price down the non-search arbitrage traffic streams & a lot of that incremental “search” volume Yahoo! had went away.

    Yahoo! went from almost an “anything goes” approach to their ad feed syndication, to the point where they made a single syndication partner pay them $4.8 million for low quality traffic.

    Given that we are talking $4.8 million for a single partner & this alleged overall revenue gap is somewhere in the $100 million or so range … these traffic quality issues & Microsoft cleaning up the whoring of the ad feed that Yahoo! partners were doing is a big deal. I am a bit surprised to see it so rarely mentioned in these discussions.

    Few appreciate how absurd the abuses were. For years Yahoo! not only required you to buy syndication (they didn’t have a Yahoo!-only targeting option until 2010) but even when you blocked a scammy source of traffic, if that scammy source was redirecting through another URL you would have no way of blocking the actual source, as mentioned by Sean Turner here: http://ppcblog.com/what-if-yahoo/

    The other thing that isn’t mentioned is the longterm impact of a Yahoo! tie up with Google. If Bing were to exit the online ad market, maybe Yahoo! could make an extra $100 million in the first year of an ad deal, but if there is little to no competition a few years down the road, then when it comes time for Yahoo! to negotiate revenue share rates with Google, you know Google would cram down a bigger rake.

    This isn’t blind speculation or theory, but aligned with Google’s current practices. Look no further than Google’s current practices with YouTube, where “partners” are paid different rates & are forbidden to mention their rates publicly.

    Negotiating with a monopoly that controls the supply chain isn’t often a winning proposition over the long run.

    The flip side of the above situation – where competition does help market participants to get a better revenue share – can be seen in the performance of AOL in their ad negotiation about 8 years ago. Their credible threat to switched to Microsoft had Google invest a billion Dollars into the company, where Google later had to write down $726 million of that investment. If there was no competition from Microsoft, AOL wouldn’t have received that $726 million (and likely would have had a lower revenue sharing rate and missed out on some of the promotional AdWords credits they received).

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