The theme of the week is how come Google is kicking Yahoo's butt in paid search? Why is Google twice as profitable in that area and why is their lead growing?

In a post below I decried the throwaway comments of a Citigroup analyst who said "Yahoo really needs to fix the search engine".

What Yahoo really needs to do is fix Overture. The best explanation I can come up with is that Overture's easy-to-understand bid-for-position model doesn't work as well as Google's very hard to understand relevance / quality score model.

Google's model for AdWords takes click-thru-rate (CTR) into account, Yahoo's model does not.

Google's model subtly ensures several things:

• Ads are more relevant
• Google makes more money per click
• Conversion rates are better

It's algorithmically better for the buyer and the seller. It's takes a lot of thinking to get to those three things from the simple inclusion of CTR in the ad positioning/bidding system, but that's what it comes down to.

Upshot: If Yahoo wants to make more money, they need to change their ad system to work like Google's.

¶ 10/22/2005