Case Study: Yahoo


The numbers, however, tell a different story. Still the fourth-largest site online, Yahoo boasts about 680 million users - more than 250 million of whom rely on the brand for key services like email and news.

Better still, Yahoo's display ad business - which ceo Carol Bartz has fingered as key to the company's "turnaround" - is showing signs of life. For the first quarter of the year, Yahoo reported display advertising was up 10 percent, to $471 million, compared with the same quarter a year ago.

Without discounting Facebook's rapid growth and Google's might, analysts insist the numbers don't lie.

"Yahoo is a major player in display advertising. Period," asserts Joanna O'Connell, senior analyst at Forrester Research. "Facebook may have a quarter of the display impressions, but it simply doesn't compare to Yahoo when it comes to providing advertisers with high-quality display advertising options."

Yahoo has "got scale, sophisticated targeting and the kind of safe environment that brand-conscious advertisers require," O'Connell adds. "My guess is that for the majority of display advertisers it's considered a go-to partner. Yahoo's recent display numbers back this up - the financials support this story."

David Hallerman, prin-cipal analyst at eMarketer, doesn't subscribe to some analysts' zero-sum outlook on the display ad marketplace. "They're both lucky," Hallerman says of Yahoo and Facebook, as each is well positioned to take advantage of what he calls a "rapidly expanding marketplace."

Hallerman's view is more than a mere hunch; he added that he was in the process of finalizing a new eMarketer report, which sees overall display advertising up 20 percent year-over-year.

"Yahoo will likely be growing in the low teens," Hallerman says of the new findings. "There's a lot of new dollars flowing [into the marketplace], and Yahoo is getting a lot of the business that Facebook is not. Brand marketers are on Facebook, but they have [profile] pages, not ads."

At least in terms of display advertising, Yahoo itself doesn't think Facebook represents a serious threat. "Facebook is a definite force, and is working to figure out the display advertising space, but it delivers a far different experience than Yahoo," says Mark Ellis, vice president of  North American field sales at Yahoo. "One of the main activities on social networks is sharing content, and Yahoo's content is the most shared. We want to continue that leadership position, and we want our advertisers to come along for the ride. We also have the ability to connect brands with well-lit, quality content."

That's not to say, Ellis admitted, that Yahoo won't have to fight for advertisers' affections.

"Yahoo [like all digital publishers] must continue to innovate and deliver compelling ad experiences in the face of 'banner blindness,'" Ellis says. "Mediocrity is a threat. Consumers are savvy and need creative and targeted advertising to engage them."

What's more, "Another threat is the commoditization of premium inventory by ad exchanges and data providers," adds Ellis. "We work hard to deliver best-in-class content and experiences, and we need to protect our inventory and consumer data from being arbitraged." Bigger picture, Yahoo has still more hurdles to overcome.

For the first quarter of the year, search revenue fell 19 percent, to $357 million - after payments to Microsoft, which now effectively operates Yahoo's search business.

On a conference call in April, Bartz admitted that the Microsoft partnership, which was formed about two years ago, was not delivering the expected results.

Yahoo's net income for the first quarter fell 28 percent, to $223 million, or 17 cents a share, compared with $312 million, or 22 cents a share, year-over-year. (The comparison, as Yahoo was quick to point out, would be misleading without factoring in its sale of email platform Zimbra, which had elevated Yahoo's profit for the first quarter of 2010.)

Meanwhile, Yahoo said revenue in the first quarter fell 24 percent, to $1.21 billion, from $1.6 billion. It attributed this figure to the sale and discontinuation of some products, as well as to outsourcing its search business to Microsoft. (Excluding commissions paid to ad partners, Yahoo's revenue was $1.06 billion, which was actually in line with analyst expectations.)

Google, by contrast, reported a 27 percent increase in revenue for the first quarter of the year.

Worse still, an IDC research report released in late May knocked Yahoo out of the number one spot for u.s. display ads. In the first quarter, Google's share of the u.s. display ad market rose to 14.7 percent, compared with 13.3 percent in the fourth quarter of last year, according to IDC. Yahoo's share fell to 12.3 percent from 13.6 percent. (Overall, online ad spending grew 14.3 percent worldwide to $18.2 billion in the first quarter, according to IDC, while U.S. spending grew 14.2 percent to $8.1 billion.)

"Overall, we see online display growth solid for the industry, but Yahoo is facing challenges in mobile, from Facebook, and from Google, which is accelerating its display efforts," says Benjamin Schachter, Internet analyst for Macquarie Securities.

Yahoo has also managed to keep operational expenses steady - they fell 8 percent, to $647 million, in the first quarter of the year - but only by eliminating hundreds of jobs, some once-promising products, and even a presence in certain regions. Yahoo has reportedly engaged in talks to leave its Japanese joint venture with Softbank Corp. Sources told Reuters in March that a deal to transfer Yahoo's 35 percent stake in Yahoo Japan to Softbank- which already controls 42 percent - was in the works.

Of course, some of Yahoo's woes reside only in the minds of the media. "The way the media looks at Web companies after a time - it says, let's discard them," says eMarketer's Hallerman. Yet, "whatever unfashionable [stigma] Yahoo may have, it still has a lot of appeal for brand marketers."

Despite the continued criticism and scrutiny, Yahoo is trying to keep a brave face. On the conference call in April, Bartz assured analysts that Yahoo was making "tangible progress," adding that, "overall, [Yahoo's] turnaround is proceeding on schedule."

"The nature of sales is that you always want more, and Yahoo is focused, hungry, and here to win more business," says Ellis.

Echoing the company's new mantra, Ellis adds: "We believe that content is the next big phase of the Internet, and we're creating the premium content that brand advertisers crave, and great content and great advertising that will drive share shift."

To that end, Yahoo just named Jai Singh - most recently managing editor of the Huffington Post Media Group - as editor-in-chief of its media network. In the newly created role, Singh is expected to "help transform the company as it increases its original content creation, build the unique voice and programming of Yahoo's leading properties, and help drive best-in-class tools and practices," Yahoo said in an official statement.

Also last month, Yahoo boasted that its royal wedding coverage generated 400 million page views - a higher traffic level than that produced by the Japanese earthquake.

For the second quarter of the year, Yahoo recently said it expected revenue - excluding payments to ad partners - to reach between $1.075 billion to $1.125 billion. Setting certain items aside, Yahoo said it expected income to be $160 million to $190 million. Adds Ellis: "There's no reason not to feel excited about our future."

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