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YAYGDA (Yet Another Yahoo Google Deal Article)

Information week describes the current “Yahoo/Google deal” as being one that would “allow Yahoo to place Google ads on its site and collect the revenue.” But in reality it is a deal that will allow Google to sell Yahoo the rope to hang itself. To the theorist’s eye the deal looks like a doomsday machine designed along the lines of a simple game called a “stag hunt.”

In “stag hunt” a number of hunters set out cooperate and hunt (with a guaranteed result) a single stag together (and split the benefits). The twist in the game is that to succeed the hunters all must cooperate and if a single hunter fails to show up they will not catch the stag. The problem is that each hunter can individually hunt a hare and with certainty come away with a hare (even though the value of the hare is much less than the expected value of the hunter’s portion of the stag). This is a sad game in that it is indisputably the case that for each player the best outcome is when they all hunt the stag together, but most players will likely “defect” and hunt hares. This game is similar to the “prisoner’s dilemma” but worse in that players in stag hunt defect solely out of fear and not for additional selfish benefit (as found in the prisoner’s dilemma).

How does this relate to the Yahoo/Google deal? Google got a minimum commitment from Yahoo to serve $83 million worth of Google ads on the Yahoo portal. Google is one of the few entities for which $83 million is a pittance. However it is enough traffic to generate statistics that will make it obvious to each and every Yahoo executive that the Google ads are worth around 30% more than Yahoo self-served ads (the typical historic difference in the quality of matching of the two services). So every quarter each and every Yahoo division head can decide whether to “hunt stag” (route advertising into the Yahoo system and help collect the data and experience to eventually eliminate any Google premium) or “hunt hare” and route more of their division’s business to Google for a higher immediate revenue.

Without this deal (and the intense scrutiny Yahoo is under) Yahoo would literally have all the time in the world to fix their advertising system. They are a very large company and their current system, though inferior, is profitable. So Yahoo can finance self-improvements indefinitely. It is unfortunate that Yahoo’s last few attempts at improvement (“Panama”) were not enough- but there was no reason this should have been the last attempt.

With this deal Yahoo rapidly routes all of its revenue through Google’s system. Actually because “division performance” is a positional good it could happen very rapidly (even if a division executive has the moral strength to not take the Google profits, he or she will be out-competed by a sister division executive that does and gets promoted past them). Yahoo is rapidly reduced to a farmer selling land and machinery to (temporarily) feed their family.

Once all of Yahoo’s revenues are routed though Google Yahoo will be completely blind to how their revenue is derived (unable to even confirm they are getting their promised cut: see Comparing Apples and Oranges). Furthermore Yahoo will move from being a trove of valuable content to fulfilling Google’s definition of being a “link farm” (Google has never posted the definition of this undesirable designation- but empirically you seem to match it if you serve Google ads).

Finally, Yahoo will be completely at Google’s mercy.

To quote Vinton Cerf VP and Chief Internet Evangelist at Google:

“In the case of Yahoo, the company believes that it will be beneficial to assist Yahoo with its experiment.”