So you might be thinking, why on earth would this be a good deal for either party? How can two also-rans of the internet fit well together? How can they compete against the all mighty goog? Well this harks back to my theory on the evolution of advertising and the shift to behavioral advertising.

At the moment, Yahoo is probably the number one player in this field. AOL is distant second, but the two are definitely the leaders in this market. With a combined effort on their part, they can merge the patents and IP advantages they each posses and come out with some amazing ad solutions. AOL’s Platform A initiative is already strong, but what it really needs is the massive pageviews Yahoo! has. Yahoo’s behavioral targeting is good, but could benefit from some of the stuff AOL has + AOL’s extra pageviews, the social network they just bought (Bebo), and more.

What would Yahoo get out of buying/merging with AOL?

• Bebo – 3rd largest social network in the US and Europe
• Platform A/Advertising.com – One of the largest behavioral and display ad businesses on the net. Reach to millions of sites, which Yahoo! publisher network never was able to do (probably because they never accepted anyone!)
• Netscape – Still millions of browsers out there, tons of traffic.
• AOL Mail – LOTS of additional users to be migrated into the Y! Mail platform
• AOL dialup business – something they could quickly sell off to recoup some cash
• AOL Blog Network – these are a great fit for Y! content offerings. Esp. Y! Finance

What does AOL get from this deal?

• No more Time Warner! This has been a deal that dragged them down so far, its embarassing
• Stability – Y! has lots of cash on hand and TONS of traffic, and is less fickle than TW
• More reach – again Y! traffic
• LOTS of cost savings – data centers alone would be consolidated
• Cross promotion
• More data for their ad programs.

So to me this seems like a great fit, even if Microsoft does buy Yahoo, it would cost them another $20 Billion to get it done after an AOL merger. To me this seems like a great move, even if Y! does outsource the monetization of some of its search traffic to Google. I see them as a better fit together than Y! + MS.

The last 2 days have been filled with talk about Yahoo, and why it is losing the race against google. I have what I think is the defacto reason. Period. No questions. Only answer. Ever. It all comes down to ad dollars. Let’s start with a bit of history first.

Yahoo started in this ad game in the mid 90s, before there was a critical mass on the internet as far as consumers and corporations. So Y! started by targeting the large ad buys on their properties. It only made sense to do it this way from Y! perspective, as they had the largest inventory, and didn’t have any other reasonable way of selling that inventory in a cost effective manner. So Yahoo focused on doing a couple hundred or thousand really big ad buys every year for big brand advertisers, Coke, Toyota, Nike, etc. These brand advertisers sustained the Y! bottom line quite well for years. Essentially Yahoo built itself a non-scalable sales channel, as every big name customer required a large amount of resources to support.

Conversely Google looked at the long tail approach, and realized that with such a massively varied inventory of pages to sell ads on they couldn’t do the same model of ads. They HAD to move towards a self-serve system, it was the only logical way. So with that in mind google went after the 5 Million small businesses and the long tail of advertising and hasn’t looked back since. It is much easier to sell 1 million ads at $5 a piece than 5 ads at $1 million a piece. By keeping the barrier to entry so low ($50), google has made it affordable and not risky for a small business unfamiliar with the web to try it out.

So fast forward to now, Yahoo has spent a lot of money on revamping their self-serve tools with Panama, but they have failed to expand their inventory. They could have done this by targeting publishers through their Adsense competitor ( but so far its limited in size, and very few sites support it or have been invited to join). Adsense contributed over $1.6B to Google’s bottomline in the last quarter, half that business and Yahoo could have been sitting in a different position right now.

So ultimately its up to Yahoo to step up their game. They aren’t down and out yet, they just need to realize what their assets are, and open them up. Once they improve their sales channel, and make it less dependent on brand advertisers, they can better monetize their search and their pages. Yahoo’s Achilles heel right now is its non-scalable ad sales channel. Remember, Yahoo still commands a huge % of internet traffic and is still a top-5 web destination.
I’ll be posting more on Y! in the coming days.

Disclosure: I own a limited amount of Y! stock.

After reading Karel Baloun’s post on facebook over at mashable, one thing stuck out in my mind: Karel argues that yahoo doesn’t seem to tie its properties in together. He uses 360, flickr, upcoming, and delicious as examples where yahoo has failed to integrate the sites together, but what if they just aren’t there yet? Imagine the potential for anyone of their services if they tied upcoming into 360 (and actually pushed 360), or delicious and flickr? They have all these loosely related services which ultimately could be cross-sold dramatically. I would bet that most yahoo users don’t know about upcoming or delicious.

For those of you who are writing yahoo off already, i think we all need to reexamine yahoo’s properties and see how they can ultimately ramp up their page views dramatically. Not to mention the hordes of data they are collecting on everyone that can give them super targeted demographics which translates into big ad bucks.

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