Setback for Yahoo's attempt to challenge Google

Yahoo has been forced to delay the introduction of a new advertising system that it hoped would help its Web search business fight back against the all-conquering Google.

The company's shares collapsed 13 per cent in after-hours trade in the minutes after news that advertisers would have to wait an additional three months, until almost the end of the year, before the new improved system is available.

By coming up with a more sophisticated system for matching users' search queries with relevant adverts, Yahoo had hoped to attract more revenue from advertisers. But quality testing with 175 of Yahoo's biggest advertisers has revealed that more work than expected is still left to do.

The project to upgrade its system is codenamed Project Panama. Its delay was all the more unwelcome to investors because Yahoo admitted yesterday to disappointing revenues from advertising sold on its sites.

Search engines such as Google and Yahoo usually generate revenues only from adverts that users click on, so it is important that they match the most relevant ads to search queries, but Yahoo has long admitted that its systems are not as good as competitors'.

The company claims over 400 million internet users visit its websites or use its online services each month, and it has been winning market share for its search engine, in terms of queries. However, its share of revenues from search-based advertising has fallen against Google.

In the three months to the end of June, Yahoo's net revenue rose 28 per cent to $1.12bn, excluding the cost of acquiring advertising customers, but. Wall Street had been looking for $1.14bn on average. The company reaffirmed a $4.60bn-$4.85bn revenue target for 2006, when some analysts had already penciled in $5bn.