Yahoo! Inc. (YHOO)’s Google Inc (GOOG) Move Makes Sense

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Yahoo! Inc. (NASDAQ:YHOO)! has revealed that it will start using its rival Google Inc (NASDAQ:GOOG)’s advertising services Adsense and AdMob as it looks to increase its revenue base. In an official blog post dated Feb 6, the company said that it has entered into a non-exclusive agreement for contextual advertising to be displayed on Yahoo! Inc. (NASDAQ:YHOO) and its co-branded sites for autos, finance, news and sports. This is in line with Yahoo! Inc. (NASDAQ:YHOO)’s CEO and former Google executive Marissa Mayer’s strategy to give a better experience to Yahoo’s users through more customized ads so that they can spend more time on Yahoo properties. Although Yahoo’s users won’t notice any significant change, it is almost certain that Yahoo will see increasing revenues through its partnership with Google Inc (NASDAQ:GOOG).

Yahoo! Inc. (YHOO)

This contextual ad agreement also works legally. A court ruling in 2008 made it clear that Yahoo cannot partner with Google Inc (NASDAQ:GOOG) on search engine advertising, which is why Yahoo! Inc. (NASDAQ:YHOO) hooked up with Microsoft Corporation (NASDAQ:MSFT)’s Bing search engine – an arrangement that Yahoo is none too happy with. Since the current deal is not about search engine ads it should fly right under the radar of the U.S Justice Department. Google Inc (NASDAQ:GOOG) is the undisputed king in the display ad market with an 18% share (according to EMarketer Inc’s data), followed by Facebook Inc (NASDAQ:FB) with 15% share, while Yahoo itself trails far behind with just 8% share of the $17.7 billion U.S display ad market.

Moreover, there are very few rivals for Google’s advertising platform Adsense and AdMob – although, Inc. (NASDAQ:AMZN) is gearing up to launch its own advertising service that would use its recommendation engine to display ads on other websites – a worry for sure, given, Inc. (NASDAQ:AMZN)’s ability to execute into new markets, but it’s not a worry right now.

The news of its current deal was already expected as Mayer, during the World Economic Forum held in January 2013, stated that she would prefer partnering with the bigger players, such as Google Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB) or Apple Inc. (NASDAQ:AAPL), over launching a new product like smartphones or a social network. She has rightly figured out that Yahoo is in no position to re-make itself with a grand slam but rather with a series of small, accretive moves to stabilize traffic and relevance while it continues to find ways to leverage core products like Finance, Mail and Sports.

I’ve always been a fan of Marissa Mayer, and her hire may be the best thing to happen to Yahoo in years. Within a span of a few months, Yahoo has reaffirmed its position – after several years of bickering and drifting – as a company with a plan. This was evident in the recent quarterly results, released in late January, the first full quarter under Mayer. The company’s revenues, excluding traffic acquisition costs (ex-TAC), increased to $1.22 billion from $1.17 billion a year ago, which translated into non-GAAP EPS of $0.32, up from $0.24 in 2011. For the full year, Yahoo’s ex-TAC revenues increased by 2% to $4.468 billion for an EPS of $1.17, which is $0.04 above analysts’ estimates. This is significant because not only did Yahoo top  estimates, but its revenues went up for the first time in four years, despite the shutdown of Korean operations and restructuring costs.

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