Yahoo Grabs Bigger Slice Of Declining Display Ad Pie, Other 'Fundamentals' Improving Too

Yahoo, the Big 3 online player that has been looked on as a wounded beast ever since Microsoft's failed takeover attempt last year, and the subsequent exodus of senior executives, is showing strong signs of market leadership, according an analysis released this morning by the equity research team at J.P. Morgan. In fact, the analysts, led by Imran Khan, have been maintaining an "overweight" rating for Yahoo's shares based on an assumption of a new deal with Microsoft, now say that ratings is based on the "improving fundamental strength" of Yahoo's own operations, especially its growing dominance of the online display advertising marketplace, its increasing online audience share, and the improvement of its search advertising business.

Yahoo clearly dominates the online display advertising business, a fact that OMMA magazine also found to be the case in its annual "Top Online Publishers" report, to be published soon in its June issue. But Yahoo's relative strength in the display advertising marketplace actually appears to be growing on a relative basis in a down economy, according to the J.P. Morgan analysis.

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The Wall Street securities firm painted a grim picture for the current online display marketplace, but said Yahoo has been expanding its relative share in a declining market, and that it is well positioned for an imminent rebound in online display ad spending.

"Display advertising has significantly underperformed other forms of advertising in the current economic environment," the J.P. Morgan report notes. "Domestic search advertising growth was roughly flat in the first quarter across the main players, with growth at Google offsetting declines elsewhere. Cable advertising was the second-best performer with ad revenue declines of 5% in the first quarter at the larger companies in our coverage. Even broadcasting revenue outperformed display with a -13% ad revenue decline from ABC, CBS, NBC, and Fox in the first quarter. Display advertising first quarter revenue was down 14% at the companies we examined."

J.P. Morgan analyzed 10 of the top online publishers, including companies such as MSN, AOL, Fox, CBS and the New York Times Digital, and found that Yahoo performed better on average.

"Yahoo has taken advantage of the opportunity to grow its market share as advertisers consolidate spend and shift toward online opportunities," the report said, attributing the decline in the overall display ad market to weakness in vertical advertising categories such as automotive that are likely to bounce back soon.

"In the first quarter, Yahoo display advertising declined 13% vs. AOL's display advertising which was down 18% and Microsoft whose display advertising was down more than 20% by our estimates for the same period," the J.P. Morgan analysis found.

The combined effects of a rebound in display ad market strength later this year and into 2010, with the fact that Yahoo is actually growing its share of online audiences, and is doing a better job of integrating its search data into display advertising, suggests that the company is well positioned to expand its market dominance, the report predicts.

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