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MICHELE NORRIS, host:

To find out more about online advertising and the role it plays in the possible Microsoft-Yahoo! marriage, we turn to Ina Fried. She's a senior writer at CNETnews.com. Thanks so much for being with us.

Ms. INA FRIED (Senior Writer, CNETnews.com): Thanks, Michele.

NORRIS: Ina, could you quickly explain Yahoo!'s ad model, how it makes money on ads and then how those ads are placed.

Ms. FRIED: Yahoo!, like most Internet companies, makes its money on a few types of Internet advertising. Big banner-type ads that look like magazine ads online, those are called display advertising. That's actually the area that Yahoo!'s the strongest. The other two areas are more text ads, either key word advertising, which is tied to what's going on on the screen and what you're doing, or search advertising which is served up against a search query that you might type into a search engine.

NORRIS: So I'm trying to understand this. I'm going to search for, say, bass fishing. I'm actually online right now. And I'm going to look at the results that come up. And there are, as you say, a number of ads that, that come up sort of on the right-hand side, trying to direct my attention. How much would an ad like that cost? An ad for fishing gear or travel okay?

Ms. FRIED: Right. And that's actually one of the reasons that Google makes so much money, is it varies. Advertisers will actually bid on how much they want to pay for - bass fishing, it might be one thing. Sometimes it's pennies, sometimes it's up to a few dollars for one search. If somebody's looking for something really specific that might relate to, say, a class-action lawsuit where the payoff for signing up a new customer is really high, so that's what's known as search advertising, those links you see on the right-hand side.

NORRIS: And if you go to Yahoo!'s home site, you'll also see these displays, these banner ads. How much would they cost?

Ms. FRIED: So those are priced differently. Instead of people generally bidding on them, although that can happen, too, here you're paying for a cost per thousand impressions. So it might be $5 or $10 per thousand impressions. You know, again, it's going to depend on how valuable the site you're advertising against. Those are sold more, like, traditional advertising, again, where you're trying to reach a broad audience.

NORRIS: So can Microsoft and Yahoo! partnered ever catch up to Google?

Ms. FRIED: Yeah. I mean, in terms of share, this is not going to make them an instant rival over night. I mean, they're both the leading competitors to Google, but they trail fairly far behind in a lot of metrics. Both companies want to live to fight another day. And I think Microsoft's belief is that by buying Yahoo!, it gets in the game. And then it's going to come down to years of investment. I mean, this is not a sprint, it's a marathon.

NORRIS: So as far as the ad revenue is concerned, I just want to ask you to quickly look into the future. It sounds like the Net is far from reaching its full potential as a rich source of ad revenue.

Ms. FRIED: If you compare this in the offline world, it would be as if our only main source of advertising was by opening the white pages every day. Most of the revenue comes from search advertising, or at least the most efficient revenue comes from search advertising. There's all kinds of different ways that we're going to see advertising interactive in a much more relevant way. I mean, one of the things they've talked about for years is targeting advertising based on your behavior.

NORRIS: Advertising based on your behavior?

Ms. FRIED: Sure. And that immediately sets of red flags. And in some cases, for good reason. At the same time, it can be really helpful. If you're doing a lot of surfing on parenting and baby sites, and you get - you start getting advertising that relates to babies, that doesn't necessarily seem like a bad thing. So there's a huge range of possibilities here. And really, search advertising is just the start of it.

NORRIS: Ina Fried, thanks so much for talking to us.

Ms. FRIED: Thanks, Michele.

NORRIS: Ina Fried is a senior writer at CNETnews.com.

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