Yahoo’s strategies seen late, a bit slow
Posted on Sunday, October 15, 2006
URL: http://www.nwanews.com/adg/Business/169794/
As Google whips out its fat wallet to buy the video site YouTube, it is making Yahoo look even more out of step with the fast-changing Internet advertising market.
Yahoo itself tried to buy YouTube just a few weeks ago and got as close as negotiating price and terms, according to an executive briefed on the discussions. But the talks broke down, and Google swooped in and closed the deal quickly last week, just as it has in several recent partnership negotiations. Indeed, many Internet executives are noting just how often Yahoo appears to be late and slow, both in its own business and in negotiations with other companies.
Yahoo would seem to have a strong hand. It is the world’s most popular Web site with more than 400 million monthly users and a major seller of advertising for its own and other sites. It has top Web properties in areas like e-mail messaging and music. And its management team, led by Terry S. Semel, a former Hollywood executive, is well-regarded for its skill and financial rigor.
But in recent months the company has suffered some embarrassing setbacks in its sales of both display and Web search advertising. Many advertising industry executives say Yahoo’s lead in working with big marketers has eroded as other companies have built up popular Web sites, sales operations and advertising technology.
“Yahoo has lost the favor it enjoyed a year or two ago,” said David Cohen, a senior vice president of Universal Mc-Cann, a media-buying agency of the Interpublic Group. He said his clients were reducing the share of their budgets they allocate to Yahoo in favor of newer sites, like MySpace, and sites developed by big media companies like Viacom.
“There are more players in town, and the others are closing the gap relative to the things Yahoo is good at,” Cohen said.
But the problems at Yahoo go beyond advertising. From video programming to social networking — areas of interest to users and advertisers alike — the company is losing its initiative. And each time a product fails in the market or is late, Yahoo loses some of its ability to do more deals and hire more talented employees. The company’s shares are down about 40 percent this year, sending some employees out the door in search of better shots at stock-market wealth.
In the meantime, Google is taking advantage of Yahoo’s ills to cement key deals that could make its rival’s recovery even more difficult. Before Google agreed to buy YouTube for $ 1. 65 billion in stock, it paid $ 1 billion for 5 percent of AOL, locking in the right to sell text ads that appear next to its search results. And it agreed to pay $ 900 million over threeand-a-half years to sell ads on MySpace. com’s social Web site, giving it a huge number of pages on which to place banner ads.
With these and other deals, Google has neutralized Yahoo’s big competitive advantage on Madison Avenue: its ability to sell the full range of advertising, from splashy video campaigns to text ads on search results.
Joanna Stevens, a spokesman for Yahoo, said that no Yahoo executive would comment for this article.
“We feel our business is very strong, even if we are not growing at the rates at which the financial community is expecting us to,” Stevens said. “Of course growth will slow when you already reach one out of two people on the Internet.”
Yahoo earned $ 164 million in the second quarter, and its revenue grew 27 percent to $ 1. 58 billion, while Google’s grew 77 percent in the quarter to $ 2. 46 billion.
Yahoo has been stymied because its text advertising business has been largely frozen until it completes a new software system. The upgrade is more than a year late and the delay has sucked up the company’s engineering resources and prevented it from developing new advertising products. Yahoo’s current system produces much less money from every page than Google, so it has been handicapped in bidding for advertising deals.
Moreover, Google has grown so much wealthier and has so much more stock market value that it can afford to make deals that would simply be too risky for Yahoo, said Jordan Rohan, an analyst for RBC Capital Markets. Google has $ 11 billion in cash and a market value of $ 131 billion, while Yahoo has $ 4 billion in cash and is worth $ 34 billion. “In poker terms, Google is the dominating chip stack,” Rohan said.
COMPANY STUMBLES Some analysts argue that Yahoo needs to make some bold moves to signal to investors, advertisers and customers that it is committed to innovation. The company’s audience growth is slowing. Its U. S. audience grew just 6. 5 percent in September from a year earlier, to 106 million unique visitors, while Google’s grew 25 percent.
Yahoo has made several overtures to buy Facebook, a social-networking site popular among college students. This would help compensate for the failure of Yahoo’s own social network — Yahoo 360 — to find a place in the market. It could also expand Yahoo’s appeal to young people, an area in which it has slipped.
But Rohan said it would be a mistake for Yahoo to respond to the Google-YouTube deal with a big offer for Facebook.
“Facebook is a nice small business,” he said. “I would prefer they spend less than $ 1 billion for it.”
The company’s stumbles are a bit of a puzzle, as Semel is widely considered to have built a mature and disciplined management team. He led the company out of the collapse of the Internet ad market and built a credible Internet search unit after it became clear that Google was more a rival than a partner. But in this market, what was once admirable discipline may now look like timidity.
Yahoo may well be slipping because of the sheer scope of its ambitions. It competes in news with CNN, in sports with ESPN, in e-mail with Microsoft, in instant messaging with AOL, in social networking with MySpace, and of course in searching with Google. And it does so in dozens of countries.
“It’s hard to figure out what they want to be when they grow up, even though they are grown up now,” said Tim Hanlon, a senior vice president of Denuo, the media futures consulting arm of the Publicis Groupe. “Are they a content company ? Are they a services company ? Or are they a portal to other things ? You ask three people and you may get three different answers.”
Current and former Yahoo employees say the company has been bogged down by bureaucracy and internal squabbling. For example, the company’s media group, which handles video programming, and its search group, which has a system to find videos on the Web, both wanted to offer a service for users to upload their own video clips. The search group won, but the delay allowed YouTube, a start-up, to dominate the market.
“When you become Yahoo’s size, you become a little complacent, a little fat and happy,” said Youssef H. Squali, an analyst for Jefferies & Co. INCONSISTENT NEGOTIATIONS
Companies that try to do deals with Yahoo also say they find it to be slow, demanding and inconsistent in negotiations. The discussions with YouTube floundered, in part, over Yahoo’s demands for assurances over how YouTube would handle copyrighted material, concerns that were not so important to Google, the executive briefed on the negotiations said.
“They can’t close a deal,” said a top executive of a large media company who said he was frustrated because negotiations over a partnership with Yahoo had bogged down. “They are smart guys, but they are having real problems,” said the executive, who declined to be identified because his company has other dealings with Yahoo.
Yahoo’s faltering image and plunging stock price may also be hurting its ability to recruit talented people. “A lot of entrepreneurs I talk to would rather work for a hypergrowth technology company than what they consider — and this is funny — a stodgy old Internet company,” Squali said.
Yahoo’s existing employees are grumbling that with the stock price so low, many of their options have become worthless. Some Yahoo veterans have bolted for trendier start-ups. For example, Mike Murphy, a longtime ad salesman, is now the chief revenue officer of Facebook, and Gideon Yu, Yahoo’s treasurer, quit last month to become chief financial officer of YouTube. “They woke up and realized they had an attrition problem,” said one executive who quit for a start-up earlier this year. Yahoo has responded by giving substantial raises to favored executives it wants to keep, according to one current executive who spoke on the condition of anonymity because he did not want to jeopardize the raise he received.
SIZZLE AND STEAK Yahoo is even losing ground in its strongest area: big campaigns for major marketers. Last month, Yahoo said its advertising sales to auto companies and financial institutions had slipped below forecast. Other Internet companies report strong demand for advertising.
Yahoo has also had trouble developing many new offerings that capitalize on the latest trends on the Web and offer innovative formats for advertisers. Many marketers, for example, have become intrigued by the possibilities of weaving their products into the fabric of social-networking sites. Even more, they are sponsoring original Internet content, especially video programs.
Two years ago, Yahoo made an expansion in Hollywood in an attempt to produce new video-focused Web sites, but it later backed off from the plan amid internal bickering.
“Yahoo had a lot of fanfare around its desire to get into the programming game and they have very little to show for it,” said Universal McCann’s Cohen. “We have seen sizzle from Yahoo and a lot more steak from AOL and MSN.”
Stevens said Yahoo was happy with its current video offerings.
Perhaps the biggest area of strategic confusion for Yahoo is its advertising network, which sells ads on other sites. Its Yahoo Search Marketing division has been falling further and further behind Google in selling text ads on other search sites. Yahoo lost a major source of attractive search pages when MSN began selling its own ads earlier this year. And the Yahoo Publisher Network, which is meant to sell ads on blogs, news sites and other content pages, has languished. Dow Jones, for example, pulled The Wall Street Journal and other sites out of the Yahoo network this spring, hiring Seevast, a small New York firm, instead.
Moreover, Yahoo has made few moves to expand its ad network to sell other types of advertisements like banners and video commercials, even though it is a leader in selling such ads on its own site. With a plethora of blogs and Web publishers looking to earn money from their efforts, there is a booming business in selling ads for these sites. AOL has made a major play in this field, buying the leading banner network, Advertising. com, and Lightningcast, a video network.
Google has moved to expand its network from text ads to selling banners and video ads, and the YouTube purchase will no doubt accelerate its push into video. Moreover, Google wants to sell ads in print, radio and soon traditional television as well.
“Google is so much ahead,” said Peter Hershberg, a managing partner of Reprise Media, a search advertising agency. “Google is going into new channels like video, and Yahoo is still trying to fix their core channel.”