New Yahoo ad system is dependent on clicks

Yahoo Inc. was changing how ads appear on its pages starting Monday in a bid to recapture market share lost to larger competitor Google Inc.

Yahoo will switch to new software that makes ads more relevant to Web searches and plans to complete the process by today, said Tim Cadogan, vice president of search marketing. It will take weeks or months for Yahoo to assess the effect on advertisers, he said.

Chief Executive Terry Semel is counting on the new program, called Project Panama, to win back advertisers and restore investor confidence. Revenue at Sunnyvale, Calif.-based Yahoo rose 22% last year, the smallest gain since 2001, compared with a 73% jump at Mountain View, Calif.-based Google.

“We have a lot of great ideas about what we want to do,” Cadogan said. “We need to stay focused and really learn from some of the knocks we’ve taken.”

Delays to Panama, named after the canal in Central America because of the magnitude of the undertaking, contributed to a 35% drop in Yahoo’s share price last year. The shares fell 21 cents to $28.56 on Monday.

Before today, Yahoo gave the top ad placement to the highest bidder. With Panama, Yahoo will take into account how many times an ad is clicked -- a measure of its popularity -- and the price bid, as well as other factors, in determining where they appear.

The aim is to make ads more relevant and likely to be clicked on.

“We want to get into this virtuous cycle whereby advertisers are competing with one another, not just on bid, but on the quality of what they present to the user,” Cadogan said.

Yahoo said last month that it expects financial benefits from Panama in the second quarter.