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Yahoo's Latest Advance in Search Game

Yahoo will soon find out if it stands a chance against Google in a competition for search marketing dollars.

Yahoo's new search marketing rankings model finally goes live today, and it shouldn't take very long to find out if it will make a difference.

The new rankings model, part of Yahoo's new advertising system, code-named Panama, is supposed to make the advertisements that Yahoo displays on the right side of its search results page more relevant to user queries.

Yahoo said advertisers who have upgraded to Panama can gauge the quality of their ads by viewing the quality index within the Panama application. Yahoo will also provide advertisers with an estimated average position and estimated forecast of clicks for their ad campaigns, based on budget allocation and ad quality.

The benefit for Yahoo is that the more relevant the advertisements are to search queries, the more likely a user is to click on them and earn Yahoo the money advertisers have agreed to pay for each click. It's the same cost-per-click model that earned Google $1.03 billion in profits last quarter.

Since Yahoo bought Overture in 2003, Yahoo decided which advertisements to serve next to its search results for each keyword query based on which advertiser promised to pay the most for each click.

With the new ranking model, Yahoo said all search marketing ads in the U.S. will be ranked by quality in addition to keyword bid price.

That means an advertisement more likely to be clicked on might receive better placement on a search results page than a sponsored result with a higher bid. Especially if Yahoo's new model decides the lower bid ad will make up for its lower bid with a whole lot of clicks.

During a conference call to announce the company's 2006 financial results, CEO Terry Semel said a "large majority" of Yahoo's search revenue has already moved to the new advertising platform and that the transition should be complete by the end of 2007's first quarter.

On the same call, CFO Susan Decker suggested that Panama's complete adoption would lead to increased profitability for the company beginning in the second quarter.

Gartner analyst Andrew Frank told internetnews.com if Yahoo's new system is going to work, its going to work fast. "If you don't see visible improvement by the end of the first quarter, Yahoo is probably going to have to continue to innovate."

Yahoo said it will continue to send upgrade invitations to advertisers in the U.S. throughout Q1 2007 and anticipates that all active U.S. advertisers will be upgraded to the new system by the end of the quarter. Yahoo plans to begin the rollout of the new platform in non-U.S. markets in Q2 2007.

Advertisers who want to schedule their upgrades as early as possible can make a request through an upgrade reservation page.