Smaller agencies hit as Yahoo! cuts commission rates

Yahoo! is expected to cut the commission it pays to agencies and to raise the amount they need to spend before triggering discounts.

Currently, Yahoo! offers discounts of 10% on spend of over £3,000 and 15% on those over £50,000. But the world's second-biggest search engine is expected to reduce those amounts from June 1 to 5% commission on spends of over £20,000 and 10% on budgets over £80,000.

It is a move that is likely to drive advertisers to the bigger agencies, which spend more but fail to manage search engine marketing as effectively as smaller ones, specialist agency Greenlight claims. Greenlight returns all commission to its clients.

"Clients will continue to spend on search marketing because it is the most cost-effective form of online advertising," Warren Cowan, Greenlight chief executive, said. "But a lot of agencies, which are funding their activity by commission kickbacks, will feel the impact."

Yahoo! will not be the first to reduce its agency commission, however. In January, the world's biggest search engine Google slashed the 15% discount it offered to a minimal percentage for the rest of this year, with no confirmation of its plans for 2007.

Meanwhile, MSN plans to sell its own search marketing programme in the UK this summer and has said it will pay agency commission, though it has not revealed details. Its French version is currently offering discounts of 10%-15%.

Almost 40% of UK online marketing budgets are directed to search engine marketing, the single biggest online ad sector, Cowan said. Globally, the search engine marketing sector has grown from £800m in 2002 to £2.6bn in 2005, according to Greenlight.

"It offers marketers a huge potential to find audiences and bring them to their sites," Cowan said.

In the US, search engines have never offered agencies commission.

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