How Google’s Checkbook Stymied Microsoft - New York Times Blog
Google understands that there is a powerful network effect in search advertising. That is, the more search ads it handles, the more money it will make and the harder it will be for anyone else to build a competing system. The more searches it handles, the more advertisers it attracts. And the more bidders in its auction, the higher the prices it will enjoy.
By attracting a commanding share of the search advertising activity, Google also has the best data with which to create equations that maximize the money it makes from each search. It turns out that picking which ad to display when is a subtle art that can have a great effect. Yahoo estimated that until recently, Google earned twice as much on each search than it did.
So while Google is giving Yahoo a fair bit of aid in the short run, I suspect that it is betting that in the long run this deal is going to sap Yahoo’s ability to build an effective search advertising system. That’s because Yahoo will have even less volume of searches to attract customers, raise bids and give it data with which to improve its ad selection technology.
