Yahoo Sees Social-Networking Sites Competing For Ads

There is big-time pressure now on Yahoo to make a purchase after Google's assumption of YouTube and poor third-quarter earnings. Its Web audience--Yahoo's core currency--is moving away from its portal service and spending more time on social media sites like MySpace, YouTube, and Facebook. In fact, it blames its weak fourth-quarter outlook on a glut of competing social networking sites.

Speculation is rife that Yahoo might still be trying to buy Facebook--as MySpace and YouTube are no longer for sale--but both parties appear to be deadlocked over price. "Facebook is only of value if Yahoo pays the right price," says Jim Friedland, analyst with Cowen & Co., referring to the $1 billion price tag that's been floated.

Martin Pyykkonen, an analyst at Global Crown Capital, points out that Yahoo's growth in total users to its sites slowed to about 2 percent in the third quarter, from a rate closer to 8 percent in the first quarter. Social networks, meanwhile, are growing at double- and triple-digit rates. Pyykkonen rated Yahoo's stock as "overweight."

During the company's third-quarter conference call, Yahoo Chief Executive Terry Semel said: "We believe now is the time to make investments in new audiences and new ways to engage them to ultimately build new revenue opportunities." But if not Facebook, then what? Digg.com? Thus far, Digg's executives have signaled they're not keen to sell--which means they're probably holding out for a $1 billion offer, too.
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