Off to a great start

Pricing screenPanama: A country, a canal, or the next generation of Yahoo!’s search marketing?

Now that I've had a chance to catch my breath after announcing our quarterly earnings this week, I thought I'd reflect on something that I think is probably the most important news you've heard from us in a long time. As I said last quarter, we're laser-focused on improving how well we monetize our search business. It's important not only for our shareholders, but also for the vast number of advertisers that want to tap into this incredibly cost-effective and wildly popular marketing medium. By the way, the better we are at helping these marketers, the better Yahoo! Search becomes for the millions of consumers who rely on it. Let me explain why.

I'm extremely pleased that an important piece of our new search monetization system (a.k.a. "Project Panama") will soon make its debut. In about two weeks, advertisers in the U.S. will experience a whole new way of ranking text ads on Yahoo! — and consumers should find that text ads are more relevant to what they're searching for. Search ads will no longer appear alongside search results based solely on the bid price for a particular keyword. We've developed algorithms that also factor in the ad's "quality," which is based on historical performance (how often consumers click on it) and its relevance to what the user is searching for. Higher quality ads will generally receive better placement, and may even cost less in some cases. And the system will grow smarter over time.

What does all this mean? Advertisers will have more control over and visibility into their campaign performance, giving them greater confidence in (and potentially greater return on) their investment. It also means that the millions of consumers who come to Yahoo! to search for information on the Super Bowl, Lindsay Lohan or tax deductions will find text ads that are even more relevant to their searches. It's a self-reinforcing cycle, a win-win for advertisers, publishers and consumers. And we hope for our shareholders, too.

We're ahead of our own schedule for turning on this critical new feature (a Herculean effort by all involved) and are receiving tremendously positive feedback from customers on the system itself. We're feeling fantastic about having this milestone under our belts.

Stepping back, I think we're off to a great start in 2007. We're hitting an important milestone in becoming more competitive in search. We've also made progress in sharpening our focus to address our challenges and opportunities. The pieces of our company realignment are moving into place. We ended 2006 outperforming the market as the largest display ad network in the world and intend to do so again in 2007. And we're supporting our mission to connect people to their passions, their communities and the world's knowledge with continued investment in our social media, video and mobile services.

We have plenty of hard work ahead of us, but I feel good about where we stand today and about the opportunities around the corner and down the road. Til next time…

Terry Semel
Chairman & CEO