Yahoo!: Adding Reach

The Economist quotes “an outside adviser to Yahoo! who has sat in on executive meetings,” as saying, that the company is, “not an entrepreneurial culture” and that it has a “relatively constipated process of reviewing anything.” This may seems a bit abrasive, but Wall Street has not been kind either, it has dumped Yahoo! stock heavily twice in the past three months. However, Yahoo! recently made two announcements that could signal a turn in the tides. The first announcement was that its toolbar and search programs will be pre-installed on millions of Hewlett-Packard computers, and the second, that it will open up the code of its Yahoo! Mail email application. It may be the second announcement that is the most significant as it could suggest that the company is looking to make its Web portal a platform for Web services, similar to what Microsoft is planning with Windows Live. The first announcement is more indicative of Yahoo!’s immediate need to capture online advertising revenue. NewsFactor states that, “Yahoo is banking the new built-in toolbar will generate more search requests and increase ad revenues.” Both announcements are meant to show that the company has the ability to pull itself out of its current stall and shake its troubles off.

Henry Blodget, founder of Cherry Hill Research, believes that Yahoo!’s current troubles began back in the 1990’s when Yahoo! bet on its service as a portal and not on its search service for income. This lead to Google’s domination in search and targeted advertising which is now returning Google’s investment and allowing the company to keep making strides that separate the two. Yahoo!, though number one in terms of site visitors, is not number one in market value. Google, with just slightly more in revenues, has three and a half times Yahoo!’s market value. Whether or not the current situation stems from as far back as Blodget believes, one thing does appear to be true, advertising is hurting Yahoo!

Prior to the positive announcements of joining with HP and opening its email code, Yahoo! last month announced that its advertising revenue is not as high as anticipated. The slowdown in ad-generated income will put the company’s gross third quarter profits in the bottom half of its forecast, $925 million to $1 billion. Yahoo! CEO Terry Semel said, “I think in this current quarter we are seeing some slowing (in ads) with perhaps two of the largest sectors, in both autos and financial services . . . They are still growing, but they are not growing as quickly as we would have hoped in this moment of time.” News of the information led to a stock drop of $3.25 or 11.2 percent, with stock closing at $25.75 on Nasdaq. Wall Street’s response is not based solely on Yahoo!’s inability to create revenue from reach, but on the fact that other companies are not seeing a similar decrease. For instance, according to BusinessWeek Online, Google, “made $1.7 billion in net sales during the second quarter of 2006, in part because advertisers trust that it can deliver relevant ads to the right audience.” Not only does this quote illustrate the fact that other companies are faring better in online advertising, it also reveals what Yahoo! is up against; the market’s trust in Google’s ability to deliver targeted ads.

Yahoo! is aware of its competitor’s prowess and in an effort to rise to the challenge the company began creating Panama, an application to improve its ability to generate relevant and targeted ads. Yahoo! is not alone in their thinking, analysts believe that the importance of targeted online advertising will grow in coming years; according to eMarketer this market will grow from $1.2 billion this year to $2 billion in 2008. One might think that having a product like Panama in the wings would show that Yahoo! is thinking competitively and would keep investors happy, however, Yahoo! announced in July that Panama would be delayed until the end of this year. Yahoo! spun news of the delay, saying it was indicative of the application’s importance and the company’s commitment to releasing a complete and well designed product. The Economist notes Semel’s reaction, “Yes, agrees Mr Semel, it was supposed to be released a quarter earlier, but this sort of market reaction was silly. Unlike Google, which has a habit of releasing sloppy brainstorms in test versions called ‘beta’, he says, Yahoo! wants to launch a fully functional product, and therefore had to be cautious—and since the financial benefits will come next year, why should the stockmarket get into such a tizzy?” Wall Street seems to be listening to analysts rather than to Yahoo!, a stock dump followed this announcement too.

Though Yahoo! may be putting some faith in Panama, it might not put all its eggs in one basket. It has been reported that Yahoo! is looking to further extend its reach through an acquisition of the second ranked social networking site Facebook, reportedly for up to $1 billion. News Corp., which bought the number one social networking site MySpace last year, has shown that such sites have great potential as moneymakers. Purchased for $650 million MySpace has already struck a deal with Google which will pay at least $900 million for the right to serve search ads on the site. But Yahoo! has had trouble in this arena; not only did it let News Corp. win MySpace, but it also lost to Google the right to place ads on the site. (It lost similar bidding to place ads on Facebook, Microsoft won that contest.) Yahoo! is now left with the question of whether or not grabbing the runner up, if indeed they are available, is worthwhile. As a runner up in the social networking scene, Facebook lacks the reach of MySpace; in July Nielsen NetRatings indicated that MySpace had 45.8 million unique visitors, compared to 14.8 million in August for Facebook. Still, some believe that the site has potential and that the price tag, though higher than that of MySpace last year, is worth it; Tim Boyd, a research analyst at Caris & Co. is quoted as saying, “If you look at what Google paid to be the exclusive provider of advertising, a billion for Facebook looks to be a reasonable price.” However, though the potential may be there, owning the site would not mean a sure win for Yahoo! As Boyd notes, “My opinion is that I don't think anyone is going to monetize things the way Google does. The best that anyone can do is try to prevent Google from gaining more market share.” A purchase could work out for Yahoo!, but on the other hand pursuing it could make Yahoo! look desperate, something Wall Street might not take well to.

A more complete version of this posting, with accompanying informational charts, journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found at Northern Light's Internet & Information Services Market Intelligence Center

And in the following articles:

How Yahoo! Gave Itself a Face-Lift
BusinessWeek, October 9, 2006
To avoid design by committee, Yahoo deferred almost every decision to an impartial judge: data generated by users' clicks. "We have this culture of data," Bhat explains. "It is the biggest enforcer of honesty." Now, with a multimillion-dollar ad campaign to promote the redesign under way, the company is keen to see whether it has truly created a page based on what users like rather than what Yahoo wants.

Yahoo to Be Featured on H.P. Computers
New York Times, September 29, 2006
Yahoo said Thursday that it had reached a deal with Hewlett-Packard to place Yahoo search and other services on H.P. personal computers sold in the United States and Europe. Financial terms were not disclosed. Hewlett-Packard has agreed to feature a co-branded Yahoo-H.P. Internet toolbar on its computers and to make Yahoo the default search service in Microsoft’s coming Internet Explorer 7 on some models.

Yahoo Allows Outsiders to Innovate on Yahoo e-Mail
Reuters, September 30, 2006
Yahoo Inc. is set to allow outsiders to create new services using the world's most popular consumer e-mail program, in the broadest move the Web has yet seen to enlist independent programmers to build a company's products for it. Officials of the world's largest Internet media company said on Friday it planned to give away the underlying code to Yahoo Mail, one of the crown jewels of its business, in a bid to encourage software developers to build new applications based on e-mail.

Terry Semel's Long Pause
Economist, September 28, 2006
"Now let's just pause for a second.” It is the fourth pause for thought that Terry Semel, chairman and chief executive of Yahoo!, has requested in about ten minutes. He is trying to marshal various arguments to prove that his firm, the world's largest internet company by visitors to its website, has a coherent and winning strategy compared with Google, a phenomenally successful search engine. With only slightly bigger revenues, Google has three and a half times the market value of Yahoo!. Twice in three months Wall Street has dumped the shares of Yahoo! and widened the gap.

Yahoo Keeps Its Eyes on Facebook
BusinessWeek Online, September 22, 2006
Is Facebook really worth $1 billion? Analysts easily agree the answer is yes. Whether it's worth that much to Yahoo!, however, is a more complicated question. The Web portal initially offered Facebook $1.4 billion, according to people familiar with the deal. Talks broke down in July, about the time Yahoo shares lost 20% of their value on news that its new targeted advertising technology would be delayed. Sources close to Facebook say there has been no new deal, but discussions could easily resume. Speculation that a transaction may be in the offing surfaced on Sept. 21, after The Wall Street Journal reported that Facebook and Yahoo are in "serious" talks on a deal.