Web X.0

An alternative Plan B for Microsoft

Yahoo remind me of the famous saying about the Palestinians:

"They never miss an opportunity to miss an opportunity"

After playing a hand of cards they didn't have with Microsoft, they have now essentially committed harkiri by becoming a node within Google's business. Why would any advertiser now bid on Yahoo's platform? I can't find a single reason, and I doubt advertisers will either (not that they had many reasons before...). I agree with Michael Arrington - Yahoo totally screwed this up, and their search business is pretty much dead.

Now everyone seems obsessed with Microsoft's next acquisition target. I'd like to offer Ballmer my 2c on a potential alternative to the $50B acquisitions they're looking to make. It's called the 200% rev-share program.

But first, a little background:
Online advertising is a strange business. While the advertisers are the ones paying for everything, acquiring advertisers is a secondary concern for an ad network. A distant second. The #1 key to making an ad network work is the publisher side. Even though the publishers are being paid, it's much more difficult to win publishers than it is to win paying advertisers. The reason is pretty simple: Ad space is binary, while advertising budgets are not. A publisher has to make a binary decision on who gets to sell certain ad space. Whoever they choose becomes the de-facto exclusive "owner" of that ad space. Publishers cannot take risks on that kind of exclusive deal, and therefore they all choose the leader who has proven to monetize best - Google in the case of text/search ads.

Advertisers, even though they are the ones paying the bills, are much easier to obtain because their choice on how to distribute their budget is not binary by nature. They can put some money on Google, some on MSN, some on Quigo, etc. Advertisers will generally follow the distribution. He who has publisher real estate will eventually get the advertisers. The other direction is far from guaranteed (see Miva, LookSmart, etc, etc).

A much better plan B for spending those $50B is by seriously upping the rev-share paid out to publishers. And I'm not talking about upping it from 60/40 (about what Google pays out), to 70/30. My suggestion would be to go for a 200 / -100 rev-share with publishers. Take those $50B and use them subsidize the publisher earn-outs for the next couple of years. 

Publishers are dying to have an alternative to Google for monetization. The trouble is that no one has been able to naturally monetize better than Google. And that gap is widening by the minute. This game cannot be won in a dog chase.

The only way to get back into the game is by locking publisher distribution, and the only way to do that is by out-paying Google, even if that means doing it artificially via subsidizing the rev-share and not though higher yield.

Microsoft should offer a 200% rev-share to all publishers (and search sites, etc) for next couple of years until every publisher in the world is talking about how much better monetization is with MSN than it is with Google. When that happens, critical mass of distribution will occur, attracting massive advertising $$'s, allowing Microsoft to *slowly* throttle down the revenue split to under the 100% mark.

This isn't too crazy... If anything, I'd go for a 300% or 400% rev-share and completely nail this down. Google can obviously react to this and raise rev-share splits as well. But for Google this is the *only* revenue source and it would be awfully painful to turn that into a money loser. Microsot can still afford to do this while Windows and Office are still the cash cows that they are. In addition, some of these publisher subsidies will be offset by the improved monetization of MSN's own properties.

This is one of those unique moments where it can really be said that it's now or never.

The chess game continues...

So it looks like the predicted Microsoft-Yahoo deal will happen finally. This is waaaaay overdue - it should have happened back when MSN decided to leave Overture and pursue its own performance-based ad platform. The day that happened (sometime in 2003 as far as I remember) created 2 losing platforms.

I love the timing of this announcement. Looks like Microsoft were sitting on this waiting for Google's stock to dissapoint, and then hand it a beautifully timed 1-2 blow. Cool.
(on a side note - it's really great to see Google's stock crash from $750 to $525 within 3 months... healthy reminder that Google does not have exclusive rights to the world's wisdom and shareholder value)

Seems like the next natural move will be for Time-Warner to spin off AOL (disclosure: I co-founded Quigo which is now part of AOL), and sell it to Google (~$25B?...). The game is advertising, and the key is distribution. There are more ad $'s flowing to the internet every day, and not enough high quality distribution to meet that demand. With Yahoo out of the game, AOL will now be the #1 biggest player with available ad inventory (both on its own properties as well as on its huge platform-A). In a 2-player race, Google will not be able to afford losing AOL to the MS/Yahoo combo and will have to make this move (not to mention that it already owns ~5% of the company). Interesting days...

Mahalo

Mahalo is probably the most interesting company I've seen in a while. I'm betting this is going to be a huge success - much more than most people realize.

Last week I said exactly that to a couple of VC's that asked me what I'd invest in personally these days. By the WTF?! looks on their faces and the questions that followed (below) I understood that I've been eternally disqualified from giving them any investment advice... ;-)

• "Why invest in a company with zero technology that relies entirely on expensive human labor?"
• "How will they ever compete with Google with all their PhD's, and algorithms, and servers, and $$$'s?!?!"
• "Isn't this the failed Ask Jeeves all over again?"
• Etc, etc.

Disclosure first: I have no connection to Mahalo whatsoever. I don't know Jason Calacanis personally, have never met him, and don't know anyone else involved in this company. I have no insight beyond seeing what's up on Mahalo.com

Here's why I think this is going to be big big big:
The best thing that ever happened in search is obviously Google. And for a while (2000-2003ish), Google's search results were way better than anything else - AltaVista, LookSmart, AskJeeves, etc. But it's growth was also it's biggest curse - the whole world became obsessed with manipulating Google results using SEO[1]. 

Today Google's results are very reasonable on average. C+ or even a B- . On the more commercial terms there's a ton of crappy link-farm, AdSense-infested pages, while on the longer tail of queries the results are usually pretty good.

Google, doing what it does best (=develop huge-scale infrastructure and algorithms), keeps innovating at a furious pace and constantly improves its search algorithms and spam filters. In classic Innovator's Dilemma fashion, they're doing an incredible job on improving the stuff that made them so successful to begin with...   

Mahalo in contrast is doing something seemingly stupid - paying human beings to create the perfect search results for the handful of queries that matter (=the ones that get ~70% of the search traffic). The most common mis-perception is that they are competing head-to-head with Google, and that doing this manually is not scalable. The truth is, I don't think Mahalo is in any sort of arms race with Google... Google is already taking care of that piece itself by spending huge capex on constantly growingly sophisticated algorithms and infrastructure. Mahalo, like Quigo (my company), is playing in the same field as Google is, but they're playing a completely different game. And that's the beauty of Mahalo.

Mahalo's assumptions are simple:

• 70%+ of the search queries are on a tiny # of terms (10's of thousands at most).
• An intelligent human being, given enough time, can *always* create a better search result than any algorithm currently can.

Google's incredible infrastructure is the world's greatest machine for providing a fairly good response to *any* query that anyone submits to it. Algorithms are great for scale, but they are a game of compromises. They're blankets that when pulled to cover one problem, expose different problems in completely different places.

That is the big disruption opportunity that Mahalo is betting on. They're never going to compete with Google on processing power, or algorithmic sophistication, or the handling of long tail of sites or long tail of queries. If I were Jason, I'd happily leave those nasty headaches to the Google (/Yahoo/Microsoft) geniuses to solve. Those issues aren't getting any simpler, so they are guaranteed to be a huge resource sucker. Arms races are never a very good business model for a startup.

Mahalo has identified the huge pile of low hanging fruit and is going to pick it up. If Google's pitch to the users is "We'll get a fairly good response to *any query* you hit us with", Mahalo's pitch will be "We'll guarantee you a *great* response for the majority of your queries. For your other queries we hole-heartedly recommend using the long-tail experts - Google/Yahoo/MS/etc"

As with the Innovator's Dilemma, Google & Co will have a difficult time emulating this because it would essentially mean taking a 180 degree turn from what has served them so well up until now - convince the whole world that their search algorithms are superior to everything else. My guess is that they'll counter Mahalo with improved search algorithms, better personalization algorithms, better spam filters, etc, etc. This may work, and it might not. After all - at the end of the day these are all just blankets.

Jason Calacanis and Mahalo have the opportunity to be the first true disruptors in the search business since Google came along and ate everyone's lunch. The fact that many folks, like those VC's I met, don't get this just makes it an even bigger opportunity IMHO because it means people (like Microsoft and PowerSet) are still going to try to one-up Google which is stupid to do against the best one-upper in the world today. The real disruption will come from "one-downing" Google like Mahalo is doing.

Should be fascinating to see this happen.

If I were a VC - I'd be on my knees begging Mahalo/Sequoia/Jason/whoever to get in on this deal.

If I were Google/MS/Yahoo - I'd try to buy this while it's young, or at least put some money in it now. Don't let the NIH choir pooh-pooh this....

If I were looking for a job at one of the search engines - I would definitely go to work for Mahalo[2] and not one of the dinosaurs.

------------------
[1] Funny thing is that the biggest driver of  all the SEO crap is Google's AdSense which actually let all these people profit from the Google traffic... but that's a story for a different post.

[2] ...or Quigo. The interesting stuff and the biggest potential upside is with disruptors like Quigo and Mahalo (or Google in '99). We currently have 19 open positions listed. Come change the world!

 

Search queries vs. search referrals

Don Dodge talks about discrepancies in reports of search market share. Apparently, Google has an estimated ~45% market share of search queries (according to ComScore), but many site owners see more than 70% of their search referrals coming from Google.

Why such a big discrepancy? Don speculates:

Search referrals are different than number of searches performed. Rich, Jeremy, and I are measuring search referrals to our sites, versus market share for the number of total searches performed.  You have to ask yourself, how important are searches that didn't lead to a referral? Meaning, the searcher didn't actually click on a result.

Sounds to me like a very Microsftian way to asking this question... isn't the real reason this -

The quality of Google's search results is superior to the other engines, thus for every X queries conducted a lot more clicks/referrals (=good search results) occur on Google than do on the competing engines...

Am I missing anything?...

The Yield Optimization Dilemma

With Yahoo recently announcing their intention to join the rest of the civilized world in optimizing their text ads for yield (rather than for bids, which can be fairly meaningless in a PPC world[1]), and with Wall St shaking up a little, it's a good time to look into an interesting, and generally overlooked, aspect of the yield optimization algorithms used by Google, Yahoo and MSN.

But before jumping into the Yield Optimization Dilemma, a little bit of background:

First came Overture and ranked results by cost-per-click bid. The highest bidder always got 1st place, etc.

Then came Google, and by combination of: a) having to bypass Overture's patent on CPC-based ranking, and b) figuring out that CPC-ranking can, again, be quite meaningless[1], they introduced a yield-based algorithm for ranking ads.

Yield-based ranking basically means that ads are ranked according to the following formula:

Yield = CPC x CTR

Or in English - The yield of each ad is determined by what the advertiser is bidding (CPC) times the # of clicks users are actually committing on that ad.

The beauty of yield optimization is that it inherently improves the relevancy of the ads shown over time, and therefore is good for the publisher (more $$ money[2] for its screen real estate), good for the advertiser (ads shown where users "vote" them to be relevant), and obviously good for the ad network (again - more money).

On its surface, the yield optimization formula (Yield=CPCxCTR) has the feeling of being 'scientifically true', and can therefore always be applied to auction-based ad networks as-is.

But there's a devious little detail in these formulas that is completely overlooked these days, but could be a major issue in times of recession and diminishing advertising budgets. This factor, which is baked into all the yield optimization algorithms out there, can be summarized as:

The Yield Optimization Dilemma - When optimizing display of ads for potential yield, should it be the publisher's yield be optimized, or the ad network's yield?

I know - it's almost petty to mention this issue these days. Google is flush with ad dollars[2] and with multiple advertisers competing for every conceivable word mutation. With about $1B estimated of unspent ad budget by Google advertisers[3], Google can almost always show the best ad (=highest yielding) on all of its page views, both on owned properties (Google.com, Gmail, etc) and on 3rd parties via the AdSense network.

But if the advertising history has taught us one thing, it's that the ad market is cyclical and very sensitive to recessions. After every advertising bull run, it is almost guaranteed that a recession will kick in. And when that happens, the first budgets to be slashed are usually the advertising budgets.

When that day comes, and I bet it does[4], this is basically what will happen within the black boxes of Google, Yahoo and MSN millions of times per day:
"We have 1 ad with a remaining budget of $X which is the best yielding ad for keyword Y. That keyword has just been submitted by an AdSense/YPN/MSNwhatever partner, but we predict this keyword will be submitted to our own search engine (Google.com/Yahoo.com/Live.com) 100 times during the remainder of the day. Should we serve Great Ad to the partner site, or keep it for later for our property?"

Remember that every such decision is amplified about 4x by the revenue-share factor (=Google/Yahoo/MSN do not share revenue on clicks on their owned properties and therefore they make about 3-4x more on each click generated on those properties versus clicks on sites within their networks).

In numbers this is how this decision might look on 2 ads, one of which is yielding a $1 eCPM, and the other yielding $1.5 (assuming a rev-share of 70-30 with the publisher[5]):

1. Do-No-Evil algorithm (or - Good Ad served on partner site) - publisher makes an effective CPM of $1.05, while Google makes an effective CPM of $1.45
2. Do-Evil-As-Long-As-Nobody-Notices algorithm (or - Good Ad kept for Google properties) - Publisher will drop to a $0.70 eCPM while Google's eCPM jumps to $1.80

That's a 25% difference in revenues for the ad networks operating their own properties, all with a simple flick of an algorithm that only they control, and probably only they truly understand.

In times of advertising recession, when this Yield Optimization Dilemma will pop up on servers many many times a day, the decisions made may amount to tens or even hundreds of millions of dollars annually going (or more likely - NOT going) into publishers' pockets.

Publishers should be aware of this, as it's part of the cost of doing business when handing ad management over to companies that are big publishers themselves and have a huge financial interest in monetizing their own content before they monetize a partner's site.

 

[1] I say that CPC-based ranking can be meaningless, because an advertiser can bid $50 per click yet have an ad so irrelevant that no one ever clicks on it, making its overall yield for Yahoo and the publisher a nice round $0 for all the impressions it was shown on.

That $50 ad may be "pushing out" an ad with a 50c bid that's extremely relevant to the keyword and can get tons of clicks, making it a very high yielding ad.

[2] This one's for you, Tami.... ;-)

[3] As estimated by Goldman Sachs analyst Anthony Noto during Google's recent analyst day.

[4] Of course Google is much more resilient to such economic downturns, thanks both to it's large advertiser base (~350K?), and the fact that it is heavily geared towards direct marketers who are much less likely to slash ad spending than brand advertisers. But if I have to place my chips, I will bet that a recession will eventually hit, and even mighty Google will find itself with more content than it can supply ads and budgets for.

[5] This is obviously an extremely simplified example. There are many other parameters in the real world, but the genera idea is basically the same.

Why Yahoo will acquire Techmeme

Techmeme (formerly - Memeorandum) tracks and ranks conversations, or - memes, as they emerge in the blogosphere.

Techmeme is for blog post discovery, what PageRank is for regular web search. While PageRank focuses primarily on link analysis, Techmeme considers the other parameters that are unique to blogs - comments, trackbacks, etc.

Techmeme does an excellent job of surfacing the important current discussions and the most important sources to the top of the page. In the blog discovery space, those are the things that matter. Text analysis and link analysis (both areas traditional search engines are strong at) are far less important. Try Google's Blog search to see how bad blog discovery can be when traditional ranking algorithms are applied to the blogosphere.

And therefore I think it's absolutely inevitable that one the big three - Google, Yahoo or Microsoft will acquire Techmeme, and I'd be surprised if that doesn't happen in the next couple of months.

So who will it be?

Microsoft probably needs this most for their search war chest, but I'd be very surprised if they end up picking this up. They seem too busy in the Google dog chase to make moves that are ahead of the curve. I'll give them a 10% chance at most.

Google is tough to predict... On the one hand, they are busy buying any small company with cool software that they like. I hear Techmeme is a one-man show (or close to that), so there's definitely a match there. But most Googlers also suffers from the NIH syndrom, and acquiring a company like Techmeme will be like admitting that someone outside the Googleplex can think of an algorithm better than theirs. That's pain that Googlers don't like taking, and therefore I'll rank Google with a 20% chance.

Which leaves us with Yahoo. The only company that seems to combine true vision, with the humbleness needed to admit that good ideas may in fact emerge from outside the company is Yahoo. It is also the company that seems most interested in user-generated-content and therefore having the best blog discovery algorithms is a good match. These facts helped Yahoo bag Del.icio.us, Flickr, Upcoming, etc. And that's why I'll give them a 70% chance of being the ones to acquire Techmeme.

Predictions are for fools, but this one (barring the naming of Yahoo as the acquirer... I may have to eat my hat on that one...) just makes too much sense.

Search vs TV

Search Engine Guide posted an article about how Ask may emerge as a significant search player, just like FOX did in the TV market:

The FOX Network does pretty well for themselves, despite sitting on the outside as the number four network player. That's the line of thinking that the folks behind Ask.com are using when it comes to their long term plan for growth.

I've heard this comparison quite a few times recently. But aren't search and broadcast TV fundamentally different?

When watching TV, especially since getting a DVR, I am picking interesting shows, not networks. I'm not even sure I can match the right network to each show I see on a regular basis. So in TV it's the shows (or - content) that matter, not the channel.

With search however, the specific content hardly matters anymore - the 4 major search engines provide similar results and similar features. Heck - they all crawl and index the exact same pages, so how much differentiation can be expected? Therefore, when choosing a search engine it's the habit the plays the biggest role. Which means that in search it's the channel that matters, not the content.

If you want to change the search game, you have to leapfrog the content and make it really matter. Relevancy and features are almost insignificant.

The Portal Dilemma

Yahoo just announced its entry into the tech publishing world with the launch of Yahoo Tech. Coverage by Mike Arrington, NY Times and John Battelle.

As I mentioned in this post, the big portals (Google, Yahoo and soon MSN) are powering the ad platforms of many media companies while at the same time creating their own competing content.

Here is what's really going on:

Yahoo and Google get 100% of the revenues on each click happening on their pages, but only about 20-30% of that same click taking place on a publisher page (via Google AdSense or Yahoo's YPN). So a user on a Yahoo/Google page is worth to them about 4-5x what the same user does on a partner publisher page.

The dilemma therefore is not really much of a dilemma at all - A portal will always strive in the long run to create its own content and attract as many users directly to it, and away from its partner publishers.

By powering the ad sales on other media companies via AdSense/YPN, the portals are leeching on these assets to grow their own advertiser base to be used on their content pages, like Yahoo Tech.

At the end of the game (as I described in this post), the portal stays with the traffic and the advertisers, while the publisher stays with declining traffic and no advertisers.

So when choosing a partner for powering a content-targeted ad network, the first question a publisher should ask is: Am I being leeched by a portal that wants to take away my business?

If the answer is 'yes' (or even if it's 'no'[1]), you should be looking at independent non-competing companies like Quigo (disclosure: I'm founder and employee of Quigo), IndustryBrains, etc.

[1] If Google or Yahoo ain't competing with your content or service today, take my word on it - they will! The 5x dilemma just makes it such a non-brainer for them over time to compete on content and services and attract the users over to their pages, even if they spend all their time denying this.

And now to the funnies...

This morning's joke is brought to you by Google (via NYTimes):

...The new browser [IE7] includes a search box in the upper-right corner that is typically set up to send users to Microsoft's MSN search service. Google contends that this puts Microsoft in a position to unfairly grab Web traffic and advertising dollars from its competitors.

..."The market favors open choice for search, and companies should compete for users based on the quality of their search services," said Marissa Mayer, the vice president for search products at Google. "We don't think it's right for Microsoft to just set the default to MSN. We believe users should choose."

WTF?! Marissa must be kidding! When I install Firefox on my computer, I get Google as the default browser search box, Google as the default home page and now Google Toolbar as the only embedded toolbar.

Instead of complaining about the MSN search box being embedded into IE7, Marissa should send Microsoft a big bouquet of flowers with a thank you note, saying how much they appreciate MS for sitting on their asses for so many years, not releasing a tiny IE patch adding MSN search by default and in the process letting Google become the biggest internet company in the world.

Google also goes on handing MS some good product advice on how it should design IE (lessons learned, I assume, from the Google'ized Firefox...):

The best way to handle the search box, Google asserts, would be to give users a choice when they first start up Internet Explorer 7. It says that could be done by asking the user to either type in the name of their favorite search engine or choose from a handful of the most popular services, using a simple drop-down menu next to the search box.

So lets clear this one up - Google is suggesting that Microsoft use its last real asset in the search war which it has practically lost (13.2% market share and declining) and hand it away to Google so that it can, in essence, become a monopoly. Lets get real about this - the embedded MSN search box is not going to make MSN the leading search... In MSN's rosiest dreams it may level the market a little and create a more competitive landscape between the big three engines. So having the market leader (Google) accuse a small and insignificant player (MSN) in exercising monopolistic behavior, is ridiculous and almost outrageous. It seems like Google is being evil here and building upon the bad connotation of the name Microsoft being associated to monopolistic behavior in very different cases.

BTW, Google will probably claim that the fact that MSN is the underdog in search is irrelevant, proof being how it came back from similar market share and killed Netscape. That is bullshit for many reasons[1], but primarily for this one:

A search engine is not a browser in one fundamental way: A browser is not something you easily swap, and is definitely not something you can use concurrently with another browser or within another browser. So in essence a browser is somewhat of a binary thing - you either use this one or that one at any given moment, making it practically a zero sum game[2]. So if one player figured out how to 'force' users to use its browser, those users would come directly out of the other's pool of users.

A search engine on the other hand is traditionally a website accessed via a browser, and that's how most of the users have come to know it and use it. So even if MS placed 20 MSN search boxes on IE7, users still can, and will, use IE7 to access Google.com via the address bar. This, therefore, is not a zero sum game, and having one player add functionality to a browser does not prevent users from using the other player's service within that same browser.

If MS were to block the site Google.com from appearing within the browser, or would re-route requests for Google.com back to the MSN search engine, that would be using the browser in an unfair way. Google's current claims are simply ludicrous.

Before wrapping up this post - Microsoft, playing the side kick in this comic article, added the following punchline:

Microsoft insists it has no intention of deploying its browser as a weapon in the search wars.

Oh yeah. If I've ever seen a weapon in the search wars, this is it.

More coverage by Don Dodge

[1] A couple more reasosn why Google aint Netscape and why browsers aint search engines:

1. Google is generating billions of $'s a year and taking over huge markets (yellow pages, classifieds, news, etc) while Netscape was at the end of the day a fairly wimpy company with close to no revenues. Netscape caused its own demise as much as MS inflicted it upon them.
2. Firefox is living proof that product quality can be as powerful as product bundling, and Internet Explorer simply became a better product than the stagnant Netscape at some point in the past.
3. Google is a pretty big bundler on its own right (Google Pack, Google Toolbar + Desktop Search, Firefox + Google Toolbar, etc, etc) so it seems like bundling is a game Google is fairly content with as it relates to its own business...

[2] Sure - you can have more than one browser installed and used on a computer, but a) extremely few people actually use more than one browser, and b) you cannot use 2 browsers concurrently (in the real time sense of it). It's either-or at any given moment.

On search engines & Yellow Pages

Interesting (though far from surprising) news yesterday from Yahoo! on evolving Yahoo Local into a de-facto Yellow Pages platform. Original announcement here, coverage by TechCrunch here, and by John Battelle here.

This reminded me of a an email I sent to a colleague last year. The background was a growing number of requests from Yellow Pages (YP) companies to use our services to expose their specific YP listings on the major search engines[1]. My email below (slightly edited to maintain  confidentiality, etc) was part of the discussion around this direction. You can substitute the name I chose (YP-Co.) for mostly any traditional yellow pages player out there as anecdotal evidence suggests that mostly all of them are either considering or already feeding their listings into the major search engines:

From a strategic point of view, I think YP-Co is going to do a big mistake by feeding their listings into Google. The way I see it, they’re digging their own grave, for the sake of short term benefits. Here’s why:

Google is quickly taking over YP-Co’s market, and YP-Co is lending them a generous hand. By feeding their listings to Google, Google gets the local coverage they badly need, while building their own advertiser base in parallel. For Google this just primes their real future business and makes it easier for them to conquer the local space directly; for YP-Co this is a good way to get a temporary spike in traffic and then slowly decline as Google builds more and more direct relationships. I can’t see any long term strategic value for YP-Co coming from this deal. I also can’t see them sustaining a long term business where they’re an expensive middle-man that essentially provides a dumbed-down version of what Google offers.

In addition, YP-Co are essentially starting to flood the search engines with advertisers competing with YP-Co on the same keywords and inflating YP-Co’s own marketing expenses. At the end of the day, a click going to a YP-Co plumber page is 10x more valuable to them than a click going directly to a random plumber. The YP-Co click has residual value and over time gets people to understand there’s value in searching for services within YP-Co. With every click going directly to a random plumber, they’re enforcing the perception that Google is actually THE go-to place for service providers, and further obscuring YP-Co. So not only are they hurting themselves by obscuring their brand value, in the process of doing that they’re inflating their marketing budgets on very important channels (push even as little as 2-3 advertisers on a category, and the YP-Co ads are either going away, or will cost them a shitload of money… )

eBay is a good example for getting this – They spend tons of money on SEM (probably the biggest spender in the world), but always promote only their category pages and never ever ever promote a specific seller page. They seem to be extremely strict about this policy, as they understand that 10x value thing between their own page and a random seller’s page. YP-Co’s case is even more extreme, as the ‘random seller’s’  page on eBay is at least under the eBay brand and within their framework… with YP-Co the links just go off to an external random site.

In short, it seems to me like YP-Co is in a lame dog chase after Google, while trying to convince themselves that they’re making smart moves ahead of the curve.

This is of course a classic example of companies caught in the eye of the Aggregation Paradox. Unfortunately, most companies blinded by the chase after next quarter's numbers fall right into the Aggregation Paradox trap. And that's what makes the companies that get it (Google, Yahoo, etc) such wonderful businesses.

[1] Disclosures, disclaimers, clarifications and other vegetables:
A distinction should be made between two cases of promoting yellow pages (YP) content on search engines:

1. Promoting of the YP category pages on the search engines. Example here.
2. Promoting of specific listings (or - businesses) that are listed within the YP database.

While I sound skeptical about the 2nd type of SEM, I applaud YP companies for being smart and practicing the 1st type.

Beyond the obvious fact that this attracts highly qualified traffic, the 1st type of SEM actually increases the YP's brand and the importance of their site. A user reaching a category page on a YP site must still engage with the site (drill down, search, browse, whatever) in order to see the business listings. Next time s/he is looking for a business there are higher chances of him/her going directly to the YP site and skipping the (now) redundant search engines step. That is great for the YP and helps maintain a sustainable and even growing business.

It's the other type of promotion, that of specific business listings within the YP, that I am referring to in my mail and which I think is a slippery slope in the long term.

And to the disclosure - My company is involved in different ways in both flavors of YP promotion on search engines.