Yahoo will on Monday unveil a long-promised overhaul of its online advertising system, setting the stage for a showdown with Google and Microsoft in the race to dominate the fast-growing search engine advertising industry.

Like Microsoft, which formally launched its own online advertising platform last week, Yahoo also said its new technology had been designed to handle the next wave of targeted, interactive advertising.

The internet companies have said that they plan to take ideas learnt in the search engine world to a wider market of cellphones, TV sets and videogame consoles.

The technology overhaul has come to be seen on Wall Street as Yahoo’s most significant single initiative this year, as it tries to overcome a widening gulf between the effectiveness of its own advertising system and that operated by Google.

The new system marks the first complete revamp since the platform was launched by internet start-up GoTo in the late-1990s and is designed to act as the foundation on which much of Yahoo’s advertising business will run for at least the next five years, said Tim Cadogan, vice-president of search at Yahoo.

Later renamed Overture, GoTo was the first company to introduce targeted advertising linked to search results, and was acquired by Yahoo two years ago. Google later adopted a similar model, prompting a lawsuit from Overture that was settled shortly before Google’s initial public offering.

Despite its early lead, the Yahoo advertising platform has lost ground to Google, and represents one of the main reasons that Yahoo’s search engine advertising revenues have grown more slowly. Yahoo generates 30-50 per cent less advertising income for each search conducted on its site than Google does, according to Wall Street estimates.

As part of the overhaul, Yahoo will change the way it prioritises the adverts that are displayed in its search results, said Mr Cadogan.

At present it ranks ads based on the amount that advertisers bid to have their messages displayed – an approach that can result in an ad hogging a key position even if no users click on it, reducing the amount of income generated for Yahoo.

A new ranking formula, to be adopted later this year, will also take into account the “click-through rate” of an advert, along with a number of other secret factors, said Mr Cadogan – an approach that echoes the one followed by Google.

The new approach will be applied “shortly after” Yahoo makes sweeping changes to the technology that advertisers use to bid for, and manage, portfolios of keywords on the system, the Yahoo executive added. Due to be introduced in the third quarter, those changes will be unveiled to advertisers and technology partners today to give them time to prepare.

Yahoo said the new user interface and management tools were designed to make it easier for advertisers to run their online campaigns and to maximise the returns from their search engine advertising, something that would encourage them to spend more.

“Search marketing today isn’t the easiest thing to do – you have to aggregate keywords and bids,” said Mr Cadogan.

While designed initially to handle keyword advertising for Yahoo’s search engine, the new platform has been built to deal with other types of targeting, using factors such as demographics or user behaviour, said Mr Cadogan.

As a result, it will eventually be able to handle adverts that can be “plugged into” a wide range of interactive services on different hardware devices, he added, such as video ads that can be inserted into an IPTV service viewed on a TV set.

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