If I was to ask you to choose between Yahoo (YHOO) or Google (GOOG) which company would you choose? This is a trick question, but for those that already started to scream “Google” I want to take a moment and look at why. If you are reading this article you are most likely interested in whether or not you should be investing in GOOG or YHOO, but this article is not about whether to buy stock in either of these two companies - that article comes later in the week. Today I want to focus on something I noticed over the past few weeks with regards to traffic on the internet and just how much of an oligopoly Google and Yahoo have. If you have paid for advertising on the internet, chances that you went through either of these feed providers is extremely high. Just how much control do these two companies have over who visits where? Look at Alexa.com’s Top 500 websites to see how many visitors these two search engines have. Want to see more numbers of just how many visitors these two internet giants have? Take a look at quantcast.com - again, note the #1/#2 split.

Now the next logical question is why does all of this matter and how do they make money from all of these visitors. That is where online advertising comes into play. The sponsored links that come up whenever someone searches for a keyword are paid for by advertisers. The order in which the ads come up depend on what the advertiser is willing to pay for one visitor. Some keywords cost up to $70 for one visitor, so it is rather easy to see how the money really starts to add up for these two search engines (to get a better idea of keyword pricing, you can visit spyfu.com). This keyword advertising is the bread-and-butter of Google and Yahoo, but there are also several wild cards in play.

One major wild card is the Content Networks of Google and Yahoo. In the Content Network arena Google has a major advantage over Yahoo. Google’s Adsense platform is the most popular content ad network available. While Yahoo does have its own content network in Yahoo Publisher Network, YPN has been in beta mode for over two years, and in that state Yahoo only accepts a very limited number of new applicants, hence limiting the money that can be made through YPN.

Another revenue stream for Yahoo and Google is domain parking. Domain parking (learn more) is a major source of revenue as both companies provide the ads that are displayed on parked pages. Along with the money generated from type in traffic, Google and Yahoo also benefit from arbitrage between the prices bid on different keywords and the price different feed providers pay per keyword. The best example of traffic arbitrage would be Business.com, which recently sold for over $300 million. There is lots of money to be made in traffic arbitrage and the main winners are Google and Yahoo, who profit both when the traffic is bought by the arbitrageur and then once the visitor clicks on the next set of ads.

Now that I have established the different ways that Google and Yahoo control traffic over the internet and make money in the process, we have the base to look at the two companies from an investing point of view. I will be writing my view on the values of these two companies and whether I believe that are a good buy or not over the next week.

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