Yahoo: Good News and Bad News

There has been a good bit of negative press surrounding Yahoo lately. But is it really justified? This article takes a quick look at what some analysts have been saying, what the search engine has been up to, and whether it’s time to search elsewhere for good news.

If you’ve been watching Yahoo’s stock lately, it must feel a little like a roller coaster that has forgotten how to go back up. As of this writing, it just hit another 52-week low, to close at $24.65 after losing 40 cents, or more than one and a half percent of its value. Stock market analysts have begun lowering their expectations for the company. WR Hambrect analyst Denise Garcia, for instance, lowered her estimate for Yahoo’s fiscal year financial results; she figures its earnings per share will hit 48 cents, not 49 cents, and estimates its revenue will reach $4.66 billion.

Why the pessimism? It seems to have been inspired by Yahoo’s admission that growth in online ad sales is slowing down. That statement actually affected Google’s stock price as well, though not nearly as much as Yahoo’s. Yahoo CEO Terry Semel fingered ad spending reductions by the automotive and financial sectors as being behind the slowdown. The fact that he could point to these sectors as being the “problem children” raises an issue I’ll return to later. But right now I’d like to ask: does Yahoo deserve the grief it’s been getting?

Think about it. This is a company that has been in existence for eleven years. It survived the bursting of the dot-com bubble. It understood and embraced Web 2.0 in all its social aspects long before its rivals (more on that in a bit). It can and has held its own (though only so far) against companies like MySpace that have come from nowhere. To back that I cite recent figures from ComScore Media Matrix showing Yahoo and MySpace as the most-visited places in July to view online video. So why all the long faces when the topic turns to the number two search engine?

It’s not as if Yahoo watchers have had nothing to cheer about. After all, the company was the first major search engine to truly embrace the online social aspects of Web 2.0. It even poked fun at itself for doing so in its own blog on April 1 this year (http://www.ysearchblog.com/archives/000276.html).

If the key to monetizing your traffic is to get a lot of traffic to begin with, Web 2.0 companies that feature a lot of user-generated content are halfway there. And Yahoo is always looking at ways to build and encourage its community. In fact, at the Search Engine Strategies conference this August, Bradley Horowitz, vice president of product search at Yahoo, emphasized the four areas of focus for Yahoo Labs as being community, microeconomics, information navigation and search, and user experience.

Yahoo isn’t just trying to be friendly either; it firmly believes that social search – getting real people involved – is the wave of the future. That makes a lot of sense for a search company that started out as a human built Internet directory. Horowitz explained that search algorithms went through four phases of evolution: human editorial, typified by Yahoo directory; mass automation, like AltaVista; topical analysis, for which we have Google to thank; and finally, social search. Yahoo believes that social search builds on the strengths of all the technologies that have gone before.

Yahoo Answers is one example of this. It connects a searcher with a community of people who can answer his question. Answers can be given by anyone registered in the community, not necessarily experts in a particular area, though there is a voting system (users can choose which answer they found to be the most helpful). It can be very addictive, or as they used to say “sticky.”

And Yahoo is continuing to buy Web 2.0 companies. Its latest purchase as of this writing is Jumpcut, a video-sharing site that provides online editing tools for creating movies. Naturally, Jumpcut will become part of Yahoo’s Social Media group, which includes photo-sharing service Flickr and bookmark-sharing search service Del.icio.us.

There are a number of ways that Yahoo could use this addition to its services. While there are plenty of video sharing services online, there aren’t that many that include online video editing tools, so that could help differentiate Yahoo from other online video sharing sites. Yahoo could also use the service to help its advertising program. For example, car manufacturers have tried to go Web 2.0 with some of their own promotions by holding contests in which people create their own automobile commercials. In any case, Jumpcut looks like a smart purchase for Yahoo at a time when online video sharing and viewing is growing rapidly.

Yahoo and Microsoft are even working together to increase their respective communities and build bridges between them, at least with their respective instant messenger programs. Microsoft’s latest release of Messenger for the Macintosh, Mac Messenger 6, lets all Mac Messenger and Windows Live Messenger users access friends who use Yahoo Messenger. This move delivers on a promise the two companies made last year.

Unfortunately, the response has been less than enthusiastic. A number of Mac users reported problems using the new client on Microsoft’s newsgroup. One user, identified as FrequentFlyer, called it a “Terrible release! Seems like this is a desperate release to keep the Mac community at bay again.” This does not sound like the kind of software Yahoo would want to be even peripherally associated with.

Still, Yahoo is expanding into more markets. Yahoo Search Marketing General Manager Sandeep Deshpande said that the company is looking at expanding its “Search Marketing Solutions” into Indian languages, but no definite launch dates have been set yet. Even so, Deshpande says, “over 50 large advertising and marketing companies have tied up (for the offering).” He mentioned ComScore’s recent figures for the area, noting that “of the 21 million Internet users in India, 85 percent visit the site at least once a month, and 64 percent use its search facility. However, though the industry is still in its infancy locally, we are optimistic about its scope and growth.”

Additionally, Japanese Internet services company Softbank reported that its new mobile phones will come with an easy link to Yahoo’s Internet content. The one-button link to Yahoo content will let users check email, stock prices, news, and Internet auctions. One of the interesting points about Yahoo’s content is that it will be free – which should stand out in a field where Japanese cell phone users typically have to pay to receive content on their headsets. Competition in the mobile phone market in Japan is heating up ahead of the imminent arrival of number portability, late in October. The ability to offer free content should give Softbank a competitive advantage, and gain lots of eyeballs for Yahoo.

If Yahoo has a lot going for it, is the advertising slowdown something that’s affecting everyone? Not judging from figures recently released by the Interactive Advertising Bureau and PricewaterhouseCoopers. The half year figures for 2006 show that US companies spent $7.9 billion on Internet advertising. The field is growing more quickly than the 30 percent that these two companies forecast last year. David Silverman, a Partner in Entertainment and Media Practice at PricewaterhouseCoopers, pointed to search advertising as still being the most important area of Internet advertising in terms of revenues.

On the other hand, eMarketer believes that online advertising will slow down in the second half of 2006, and is revising its own estimates downward. It believes the area will grow 26.8 percent – quite good in and of itself, but slower than the first half of the year. Amazon and eBay have seen their stocks go down when they delivered similar growth rates, because they weren’t growing fast enough. Only in a market like this can a 26.8 percent growth rate be considered “not fast enough”!

Indeed, these high expectations have hurt Yahoo, and the appearance of its own portal – if you know what to look for – doesn’t help. Yahoo has been running a larger number of house ads on its sites in banner positions than you might expect. Anyone who runs a site supported by advertising can tell you that you never run a house ad when you can line up someone who will pay for that space. So Yahoo clearly has more inventory than it can currently sell.

Speaking of ads, let’s return to that issue I mentioned all the way back in the first section: the slowdown in ad spending in the financial and automotive sectors hitting Yahoo hard. Apparently the company isn’t sufficiently diversified in its clientele. That’s hurting it now, and it will definitely hurt it down the line if it doesn’t work to fix it. People search for all sorts of things; concentration in just a few areas is not going to help it in the long run.

Sadly, Yahoo is also taking a step that at least one observer has described as “one of the top ten worst signs for the health of a company.” It is closing its US offices for the last week of the year (between Christmas and New Years) as a cost-cutting measure – and employees will not be paid for that week unless they choose to use vacation days to make up for it. One has to wonder, though, if the amount of money saved is worth the risk of alienating its employees – talent that Yahoo needs to hold on to in this cutthroat market.

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