What's Behind Yahoo's $55 Million Advertising Splurge in Israel

Yahoo's advertising war with Google and AOL has stepped up a notch with the purchase of Israeli-American firm Dapper for a reported $55 million. The move suggests that Sunnyvale is looking to hit Google where it hurts: Right in the customized ad pocketbook.

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Yahoo's advertising war with Google and AOL stepped up a notch with the announced purchase of Israeli-American display ad firm Dapper for a reported $55 million (the deal is expected to get finalized in Q4 of 2010). Sunnyvale, it seems, wants to hit Google where it hurts: right in the customized ad pocketbook. But Yahoo's also tweaking its ad strategy, with a sharp eye on R&D.

Dapper, founded in 2006, is a mobile phone-friendly suite that indexes products, automatically buys impressions based on user intent, and matches users to index-driven advertising—exactly the kind of contextual advertising that has long been Yahoo's weak spot. This week, Yahoo even tuned up its search engine for mobile users to steer them toward enhanced contextual advertising.

It could be the start of a new wave of innovations for the search company. "The company's development center in Ramat Gan will become Yahoo!'s development center in Israel," writes Noa Parag of local business daily Globes, and Israeli newspaper Yedioth Ahronoth and tech blog Newsgeek are also reporting that the office will be turned into an advertising-centric research lab in 2011. "Yahoo, for the first time, is taking the plunge with a product development lab which we hope and believe will grow to become a successful center, tapping into the raw Israeli talent, just as companies like Intel, IBM, Microsoft and Google have successfully done," Dapper co-founder Eran Shir noted.

This would be Yahoo's second lab in Israel. A Web search and user-generated content-focused facility opened several years ago in the northern city of Haifa. Dapper is headquartered in San Francisco and, in addition to its Ramat Gan lab, it also maintains a New York office. Yahoo notes that the Dapper team will remain in their offices.

Yahoo's purchase gives them a viable counterpart to Google's Philadelphia-based Invite Media. But Google purchased Invite in June, giving them significant leadtime in integrating their new advertising products into their services. Although Yahoo has had ownership of online advertising firm Right Media for the past three years, Right's small business-oriented approach differs markedly from the corporate-friendly services over at Dapper.

Dapper's major selling point for Yahoo was their use of context, semantics and predictive text to deliver customized advertising to customers. While Google already has the lion's share of the Web advertising field with $8 billion in 2009 profits, favorable niches exist. Yahoo has been lagging in Web advertising for several years and a strong rebound will require creative steps on their part. Dapper also has a leg up in the mobile phone field, something Yahoo would do well to take advantage of.

Local tech-watchers also note the implications of the Yahoo-Dapper deal to Israel, which has had a busy month for start-ups and technology. Google purchased Israeli startup Quiksee, AOL snatched content provider 5min.com, and the Israeli government just announced a $200 million grant for Intel that would allow the chip giant to hire thousands of new employees in Jerusalem and Kiryat Gat.

Shai Tsur of Giza Venture Capital noted that Dapper, like 5min, is one of a "current crop of maturing companies" that popped up over the past four years. Yaniv Feldman of Newsgeek tells Fast Company via email, that Dapper Israel's upcoming conversion into a Yahoo research lab is "an attempt by Yahoo to repenetrate the Israeli hi-tech industry," and that their current Haifa location is "not very attractive to the majority of the hi-tech population that is located in the center of the country," around Tel Aviv.

Despite the presence of two major research universities and a booming tech sector, Haifa is perceived as slow-paced and provincial by many younger Israelis. It is also too far away from Tel Aviv for regular commuting to be attractive. Both Yahoo and Google have made a business out of positioning research labs in international locales such as Israel, India, and Russia. The practice allows for much of the endless grind of research to be conducted at a cheaper cost than in the States.

For Yahoo, getting an extra laboratory facility out of the Dapper deal was the icing on the cake.

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