Newspaper group warns Google / Yahoo deal could tighten ad supply

In countries that know full well how the effects of a cartel can stifle an economy, newspaper editors are raising concerns that a deal between Yahoo and Google could cause the prices of online ads to become prohibitively high.

Though the current agreement between Yahoo and Google calls mainly for Yahoo to open up portions of its search results pages to ads supplied by Google, another press organization is warning this morning that the deal threatens the independence of the world's free press.

The World Association of Newspapers' theory is that a tightening of the bond between the world's #1 and #2 suppliers of online advertising makes it more difficult for newspapers to compete, by tightening the supply and availability of inventory to customers. Newspapers rely on Google and Yahoo for a big chunk of their advertising revenue, since they often serve as their online advertising platform; so maintaining their independence, the theory goes, will ensure the level of competition necessary to keep rates low and availability high.

"The competition that currently exists between Google and Yahoo is absolutely essential to ensuring that our member titles receive competitive returns for online advertising on their sites, and for obtaining competitive prices when they purchase paid search advertising," reads the WAN's statement on the matter, published this morning. "In our view, the proposed advertising deal between Google and Yahoo would seriously weaken that competition, resulting in less revenues and higher prices for our members. WAN is also concerned that this deal would give Google unwarranted market power over important segments of online advertising."

Yahoo would have less incentive to compete with Google directly if it knows Google is also one of its key customers, WAN argues.

In support of its argument, WAN cites an Associated Press article published last week, which appears to say Google has only shared about 31% of its advertising revenue in commissions since 2001.

"Of the very impressive $48 billion in online advertising revenue that Google has amassed since 2001," the WAN statement says, "less than one third of that has been returned to online publishers, and a much tinier fraction has benefitted the news and content generation industries. As such, most publishers are acutely aware that Google's ever-tightening grip on internet traffic, its unbridled use of online content, and its dominance in online advertising poses a very real threat to the continued viability of the independent content generation industry."

Indeed, in Google's last quarterly report, it admitted sharing only 28% of its revenue in traffic acquisition costs (TAC) with advertisers, or $1.47 billion -- a decline of 1% over the previous quarter. Analysts tend to watch the TAC figure as a general barometer of the state of the online advertising market. When competition heats up, Google's TAC tends to rise, on the theory that it costs more for it to maintain its partnerships. In the second quarter of 2006, Google's TAC had risen to $1.67 billion, thus underscoring not only the notion that the online ad market is heading slightly south, but that competition may be lessening for Google overall.

Back in 2004, Google used to report TAC in terms of its "Google Network revenues," which refers to income from partner sites that host Google's advertising platform. That's where it could get percentage splits such as 78%. But as a share of the company's overall advertising revenue at that time, the split was much more like 36%. The company's quarterly revenue is, on average, about 75% higher now than it was four years ago.

When TAC as a percentage of revenue goes down, the likely reason is because the prices advertisers pay to appear on Google (through, for instance, AdSense bids) is rising, at the same time the prices Google pays to acquire traffic through TAC deals with its partners, stay flat. If the WAN's theory is correct, we may see TAC percentage continue to decline, and that's not good news for its member newspapers. BetaNews has asked Google for some insight and comment, which may be forthcoming.

The WAN's leadership hails from such diverse sources as Canada's Globe and Mail, Brazil's RBS Newspapers, The Times of India, the Times of London, The New York Times, and the Yemen Times.