Yahoo! to Flip Panama Quality Switch on Feb. 5

In an announcement that caught many search marketing advertisers and professionals by surprise, Yahoo! energized a conference call about its Q4 results yesterday by declaring that it will give Project Panama, its new search-ad platform, a full launch ahead of schedule.

Yahoo! CEO Terry Semel said the company is ahead of plan in moving advertisers to the interface for its new platform and expects an early February launch for the second phase: the introduction of a quality score to determine the most relevant—and most profitable—pay-per-click ads.

The new platform could be a key to making Yahoo!’s PPC ad returns more competitive with those of Google, which currently leads the text-ad market in revenue. Previously, the company had suggested that migrating users might take until the end of March 2007.

But Semel said his company has almost finished moving advertiser customers over to the new system. “I’m happy to report that we have successfully transitioned the large majority of our revenue to the new search system,” he said in yesterday’s conference call, adding that the full Panama platform will become operational on Feb. 5.

That next phase in the rollout will introduce a search ad quality score, based in part on clickthrough rates. The system will then favor the more popular and successful PPC ads over underperforming ones, placing them higher and showing them more often.

“We believe this will deliver more relevant ads to users, which in turn will deliver higher-quality leads to advertisers,” Semel said yesterday.

He added that Yahoo! will also start making Panama available to international advertisers in the second quarter of 2007.

Google introduced an ad quality score years ago as a way to maximize ad clicks and therefore revenue. But Yahoo!’s former ad delivery system relied solely on bid price to place keyword-related ads in its search results.

The news of an accelerated Panama launch and a 13% increase in ad sales were enough to get investors looking past a 61% decline in Q4 profits. Shares of the Sunnyvale CA-based Internet company rose almost 6% in after-hours trading.

The company posted a net profit of $269 million for the last three months of 2006, compared to $683 million in the same period of 2005. Yahoo! said the decrease was largely attributable to stock options expenses and a one-time investment gain a year ago.

Meanwhile, sales were up 13% year-over-year to $1.7 billion, mostly on stronger than expected display ad sales. Yahoo’s top 200 U.S. advertisers spent 30% more on graphical ads in the fourth quarter than in the previous one. While that growth was broad-based, Semel said, it was especially notable in consumer packaged goods, financial services and pharmaceuticals.

That’s an interesting note in light of the fact that just before the company published its Q3 results, CFO Decker spoke of “unanticipated softness” in some advertiser sectors, specifically automotive and financial services.

Excluding traffic acquisition costs (TAC)--the revenue Yahoo! had to share with its publisher partners--net sales were slightly better than the $1.22 billion analysts had been expecting. Those quarterly sales after TAC were also up 15% from Q4 2005 and 10% higher than the previous quarter in 2006.

Semel said Yahoo! is executing against the goals it set during its Q3 conference to improve search monetization, open up its lead in display ads, and seize opportunities in emerging tech areas such as social media, video and mobile services. In the social arena, he pointed to the extension of Yahoo! Answers and to the acquisition of companies such as Bix.com, a user-participation contest site.

“Together, Yahoo! Answers, [photo-sharing site] Flickr, [social tagging site] del.icio.us and Yahoo! Video have surpassed 100 million monthly users, continuing our position as a leading force in social media,” Semel said. He made no reference to Yahoo’s unsuccessful efforts last fall to buy or partner with social network Facebook following the acquisition of MySpace by News Corp.

Semel also pointed to the launch earlier this month of Yahoo! Go for Mobile 2.0 and oneSearch as evidence that mobile will play a big part at the company. “We have demonstrated our intention of becoming the number one player in mobile, mobile search and mobile monetization,” he said.

Project Panama has already played a part in Yahoo’s financial fate. When it was announced in May 2006, the company originally said it would start moving advertisers to the platform in Q3 2006. That start was later pushed back to the end of Q4 due to unspecified platform problems. News of the delay immediately cost Yahoo!’s share price 21% of its value.

By the end of the year, Yahoo!’s stock had declined 35%-- due partly to Panama woes, but also to continuing revenue declines.

And in fact, while trumpeting the news of Panama’s early launch yesterday, Semel and his colleagues were careful to manage expectations for its impact on Yahoo!’s financial results.

Semel noted that although the company may start feeling the benefit of the Panama platform pretty quickly, the process of maximizing that benefit could take a few quarters. “We expect to see the revenue impact to begin in the second quarter and gain momentum throughout 2007 and beyond,” he said. “You will see ongoing development of advertising and monetization.”

Susan Decker, currently Yahoo! chief financial officer and slated to head its advertising division, said the company will watch the Panama algorithm to make sure it’s producing revenue at peak efficiency in Q1 2007.

Yahoo! also said it expects revenue of $1.12 billion to $1.23 billion in Q1 2007, and $4.95 billion to $5.45 billion for all of 2007. Those guidelines are below the figures a consensus of Wall Street analysts had anticipated for the company’s near future.

Yahoo! faced other challenges last quarter, notably a company-wide reorganization into three operational groups and the departure of two high-profile executives, chief operating officer Dan Rosensweig and media division director Lloyd Braun. CFO Decker will head the newly-created advertiser/publisher division. Chief tech officer Farzad Nazem became head of the technology division, which has responsibility for the Panama rollout. The company is still looking for an executive to lead its audience group, focused on serving Yahoo!’s users.

Semel said yesterday that Yahoo! had made the right moves in its reorganization. “I’m convinced we’re on the right path to deliver long-term shareholder value,” he said.

Panama may help Yahoo! narrow the gap with Google on search ad revenue, but few industry observers think it will be the magic bullet that brings the companies even. A report issued yesterday by David Hallerman, senior analyst with eMarketer, forecasts that Google will capture nearly two-thirds of the search-ad revenue this year, up from 58% in 2006, while Yahoo! will see only 15% of that PPC spend.

Accelerating the Panama deployment may have a “mild” influence on those Yahoo! 2007 ad revenue forecasts, Hallerman said in an interview after yesterday’s announcement. “But at this point, its main effect is going to be stanching some of the losses. Part of the problem of not having a Panama-style robust search ad platform until now is a loss of advertisers who decided to go with Google. Wooing them back is going to take a while.”

In fact, with more branding advertisers moving ad budgets online, Hallerman suggests that Yahoo! may someday opt to stop chasing Google’s search ad crown and instead pursue dominance in display advertising. “I sometimes think they might do better as a company by doing more search partnerships, or even outsourcing to Google, and then focusing on their portal side, where they are a real leader and can make a difference,” he said.

As for the impact on Yahoo!’s search marketing clients, almost all large enough to outsource their SEM and even many of the self-service advertisers have been preparing for Panama’s arrival for a month or more and shouldn’t experience inordinate pain, according to Anthony Iaffaldano, marketing director for SEM agency Reprise Media.

“[Panama] brings their platform more in line with every other search market out there and makes it ultimately more predictable for marketers,” he says. “It helps Yahoo! maximize the value of the platform—not just for themselves, although that’s probably paramount in their minds right now, but for the advertisers and publishers as well.”

Still, Yahoo!’s phasing out its bid-only search platform in favor of one that factors in ad quality marks “the end of an era for paid search,” Iaffaldano points out. That system, a relict of Yahoo’s Overture buyout, was the only remaining transparent auction market, where ad inventory and competing keyword bids were visible to marketers.

“We’re entering a new phase of the business where it’s all based on relevance but it’s all behind a curtain,” he says. “Bid management played a very, very big role in the way the industry managed paid search campaigns. When you know what someone else is bidding, it’s easy to block competitors by raising and lowering your bid, or to guarantee placement. Now you can play with your bids until the cows come home, and it doesn’t mean you’re going to get better placement. Search marketers now need to look at the end-to-end process; they have to focus on what keywords they’re buying, make their creative more relevant and build better landing pages. All of these things will now have a much greater impact on performance than pricing will.”

[For a discussion of some of the changes to come in Project Panama, click here to see our Jan. 10 interview with Mona Elesseily, Internet marketing strategist with Page Zero Media.]