Can Yahoo + Right Media Lead to a Viable Web Business Model?

Explaining how Yahoo's own ad exchange would continue to do business with Yahoo's Right Media division was a difficult assignment, but during yesterday's conference call with analysts, Yahoo CFO Susan Decker gave it a shot. Responding to a question of whether Yahoo's ad sales team can still expect to get high commissions when purchasing inventory from an open exchange operated by another Yahoo division, Decker responded, "The [open] ad network partners provide a very important source of value that's incremental and distinct from the Exchange."

"Ad networks exist as an intermediary," she continued. "They wrap inventory, and the way they get the kind of premium pricing that affords them [7% - 10%] commissions, is they have many times specialized relationships within a vertical category, they may have advanced targeting capabilities, and they may have aggregation of a specific type of audience. So we actually see the Exchange benefiting these open ad networks, because actually, many members of the Exchange are ad networks who carry that very important value in representing inventory for publishers that don't have their own sales channels, and also gives them the price discovery benefits, which is another point on the value chain of working in an exchange. So we see those as totally symbiotic." The only group Decker would see not benefiting would be a closed ad network model, she added, that doesn't link to the Exchange and whose bidding is limited to its own network.

Regulators are now more wary of situations where merged entities generate value on their books by doing business with themselves. The most notorious perpetrator was the former AOL Time Warner, which just after its merger, trumpeted soaring advertising levels for both its cable and online properties, only to be forced to admit later it was buying advertising from itself, and perhaps raising its own rates based on simulated "demand" in the process.

All of this leads to the obvious question...Why merge in the first place, if the merging parties can only achieve "symbiosis" by maintaining the same barriers and transparency they had before?

The answer concerns who gets the revenue in the end. As Yahoo CEO Terry Semel explained, Right Media was expecting $70 million revenue this year, if it were left all by its lonesome; for next year, the company projected double that. Yahoo was willing to pay $680 million for the 80% of Right Media it didn't already own, with half of that transaction made in stock, half in cash. Semel expects to see cash flow from this deal into Yahoo about 12 months after the deal finally closes, pending regulator approval. By this time, Right Media's annual income could be closer to $200 million, and growing exponentially.

As Terry Semel explained, Yahoo made its 20% investment move last year as a way of testing the waters - experimenting with the idea of a complete buyout, but also with the notion of building a new business model around Right Media's ideas.

"Our original investment in Right Media," Semel said, "was with the intention of further evaluating the business model and to gauge their market more quickly. We had a strong conviction then that, if one could have an open marketplace as opposed to a closed marketplace, and if it could encourage all sorts of publishers and producers to enter that marketplace, we would actually have real value determined by the marketplace as opposed to some black box. So we went down that as a guiding light."

But Semel went on to say that the 20% investment lit a number of fires elsewhere, and we know where those fires led. "A number of months ago, we were starting to show our strategy," he remarked, "so Yahoo has really been executing on this mission long before the announcement of Right Media. We began reorganizing our company to create an actual division, or half of the company, focused on just driving high-value advertising and publisher relationships...The Right Media move for us initially did send off some alarm bells in some other places, [which] started to say, 'Wow, if this is successful, and if Yahoo pursues this further, this could open up a whole new system of openness that enables everybody to participate and to allow the marketplace to set the terms."'

So whether Yahoo was set on making the 100% deal or not back in 2006, the forces it put in play helped make that decision - perhaps make it on Yahoo's behalf. Semel implied that Google's DoubleClick move may have been a response to this move. If so, Yahoo may have actually scored with this move, forcing Google to play all of the hand it was dealt with a partner that's rooted in an older business model.

The Yahoo + Right Media pairing may yet receive some opposition from interest groups such as the Center for Digital Democracy, which has already lodged an objection with the Federal Trade Commission seeking to block the Google + DoubleClick merger. This is in addition to a complaint filed last November objecting to Microsoft's collection of user visitation data for its AdCenter network. Thus far, the CDD has yet to comment on Yahoo.