Today Yahoo just emailed its keyword advertisers to tell them about some changes in the structure of its auctions and how ads will be displayed. Also briefly mentioned here and here. Specifically:

“we are introducing a new ranking model in the U.S. that considers an ad’s quality and bid amount. …Both bid amount and ad quality will determine an ad’s rank in search results”

While that sounds pretty low-key, it’s a hugely significant move. Yahoo is moving its auction much closer to Google’s model, a very tough but necessary decision that’ll have a major impact on their entire ad network and potentially cure some of their woes. While it may upset a few of the advertisers who like Yahoo’s current model, it’s a good decision that should’ve been made a long time ago.

Here’s what it’ll probably mean:

– More revenue for Yahoo (and affliates) from its traffic. High bids that don’t result in clicks are a waste of traffic, this new model will help weed them out.

– Improved ad quality. Individual advertisers aren’t always rewarded for high ad quality. This new model helps ensure that good quality ads are rewarded, so the quality of Yahoo’s ad network overall should improve.

– New business model opportunities. Auctions based on BOTH price and click-thru rates mean that there’s an equivalent CPM value for every keyword term. This might be worth exploring in a separate post, but if you have a $/click and a click-thru percentage – then you can calculate Cost Per thousand impressions. Up to now, only Google could do this, and it meant they were the only ones who had a keyword auction that could price ads using CPM. It was a strategic advantage, and now Yahoo has closed the gap.

– Less differentiation. Now that Google and Yahoo’s auctions are more similar, there’s fewer reasons to choose one over the other. On one hand, that probably means there will be less arbitrage on ads between Google and Yahoo (e.g. paying for advertising on one ad network to bring traffic to a landing page on the other), but it might also cause some advertisers to pick a single network. It would have been better if Yahoo not only took the best features of Google’s network but added important new innovations to put them a step ahead.

Other things it’d be nice to see from Yahoo in the future (forgive me if they already have some of them, I haven’t followed all changes):
– Remove minimum bids on all keyword terms. That’ll create more “ad innovations”.
– Remove some of the aggregation that occurs between keyword terms (e.g singluar and plural forms of a keyword). While aggregation creates stronger bidding and higher prices (because it increases demand for those keywords), it decreases precision – that precision is critical to higher ad quality and long term advertising innovations.
– Focus on conversions/ROI. Why not leapfrog Google by auctioning based, not just on quality and click-thru rates, but on actual conversions and sales figures to help determine ad ranking and placement.

So short term, the changes Yahoo made might create turbulence among existing advertisers, but in the long term they were very necessary decisions to maintain the health of Yahoo’s ad network. It’s a good time to launch something new since, as John Battelle said, the bar for Yahoo already has been lowered.

Good for you Yahoo, it was about time! Hopefully this is a sign of other great things to come.