Yahoo retools ad technology

Yahoo upgraded its search advertising system this week, making a high-stakes technology change that lies at the heart of its efforts to catch up to Google in the race for online ad dollars.

Yahoo’s search-engine makeover has been delayed several times but is considered so significant for the company’s future that executives code-named it Panama, after the canal. In the past few years, Google has continued to dominate the market for Internet ads, in part because its technology served up more relevant, and therefore more lucrative, ads. This forced Yahoo and Microsoft’s MSN to overhaul their search engines to try to match Google. This year, Wall Street analysts expect Google will face tougher competition.

“Over the last couple years, Yahoo has been surprised at the success of the other players in the market,” said Matthew Greitzer, national director of research at Avenue A-Razorfish, an online advertising firm. Panama is Yahoo’s attempt to “equalize (its) competitive standing with Google and MSN,” Greitzer said.

The project at Yahoo required rejiggering the engine that determines which “sponsored links” are placed at the top or to the right of Yahoo’s search results. Until this week, Yahoo positioned ads by highest bidder, so sometimes the top results were not the most relevant ads.

Now, Yahoo will rank ads, similar to what Google does. Yahoo will place ads based on both the bid price and measures of the relevance of the ad, such as how often someone clicks on it. Yahoo’s new engine will also allow advertisers to focus their campaigns by location of the Internet user and other demographic data, features that have been offered by the company’s competitors for some time.