As we saw in Part 1, Yahoo’s stock price has seen better days. In the beginning of this year, the company announced guidance that met expectations only to be treated with a double-digit percentage decline in their stock price. Then, in July 2006. the company again disappointed by delaying the release of their all important search platform – one expected to increase revenues by adopting a bidding system that takes into account performance not just price. They were treated with a similar decrease. Fast forward to mid-September when the company suggested softening in two of the core advertiser verticals – finance and auto – and a similar result occurred – the stock sank by 13%, leaving it 40%+ off its marks earlier this year.
Yahoo has clearly seen better days, and some of their decisions only seem puzzling. Take for example their mandate requiring employees to take off the week between Christmas and New Years. This might sound fantastic at first until you realize that they do not get this time off; employees must either use vacation days or take them as an unpaid leave of absence. Other news circulating included that the company was considering paying $900 million for the college phenomenon Facebook. Yahoo has not had success with its own social networking although it has acquired a number of Web 2.0 shops such as Flikr, del.icio.us, upcoming.org and the most recent being Jumpcut.com.
The current struggles at Yahoo certainly signal that the company feels pressure for its lackluster growth. What many have started to worry about though, and this applies mainly to the “softening” announcement last week, is whether all of Internet advertising is starting to soften. As many have pointed out, unlike Google, Yahoo relies heavily on display advertising, and it has a large concentration in finance and auto – the same verticals where they saw spending slowing. Those two areas slow, and it only makes sense that its impact would be felt. Again, the questions circling are how widely will it be felt? Research firm eMarketer, for example, recently revised its 2006 projections downward from slightly north of $17 billion to just under $16 billion. eMarketer CEO Geoff Ramsey says, "We still see robust growth, but it is difficult for any industry to sustain a 30%-plus growth rate for three years in a row." (See chart.)
Fig 3.1 – US online advertising spending (source: eMarketer)
Most pundits believe the softening is isolated to Yahoo and perhaps a few other niche sites that rely heavily on finance and auto. The real test, most believe, comes when Google announces its earnings. Regardless, it doesn’t come as much of a surprise that changes in the ad marketplace could occur. Ad spending follows the health of the companies and economy. The housing market has changed and several auto makers, Ford for example, have had to cut costs dramatically.
The good news though, is that many companies in those verticals have still found a way to succeed even as the market changes. Toyota has not had the same issues Ford has, and several lead generation firms in the mortgage space have continued to grow where others have not. Most importantly, online advertising still receives less money than its percentage of mindshare. So, even if certain verticals slow down and even if a mega site like Yahoo shows the impact, this doesn’t mean that all of the Internet will, or that we should worry.
Instead of focusing on Yahoo and the Internet, initially, this article started out as a “What If Merger.” Yahoo needs to do something, in addition to rolling out their updated search platform. Some have faulted Yahoo for having as large an exposure to graphical ads as they do. Unlike Google, their ads are not 100% click based and they are not contextual. They also do not have the large publisher network that Google does either. All told, they have less reach and do not use their impressions as wisely.
If I were Yahoo, this is what I’d do. Don’t buy Facebook. They are great, but they are number two. You are already number two. Buy a number one. Pay a little more for YouTube. Get some buzz and be the outright leaders in a particular space. Combine with Jumpcut.com or find a way to create an uber digital site by combining it with Flickr. Either way, that is money better spent than another Geocities acquisition. Or, make an acquisition that will improve the state of the advertising. Buy a Revenue Science, so you can leverage your reach plus your search and display units.
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