Don't Underestimate Yahoo

Yahoo has taken a real beating in the press and the blogosphere over the past week. A casual reading of this coverage would lead one to believe that Yahoo is on the verge of extinction, or at the very least, in the words of one commentator, "a company slowly spinning down into disaster."

Let's separate the panic from the reality, folks. Nobody argues with the assertion that Yahoo, like any mature company, has to make a few mid-course corrections; but the whole idea that Yahoo is about to charge into an iceberg is the looniest example of negative hype I've heard in months. So what's to like about Yahoo? Lots.

1. Yahoo is well-positioned to take advantage of online ad growth. We're all familiar with the broad trends indicating that online spending is rising in order to reach the generation whose lives revolve around digital devices. This long-term phenomenon is unstoppable, but creates for advertisers the continuing problem of reaching the digital equivalent of Gross Ratings Points. There are only a handful of sites capable of aggregating enough eyeballs to attract such brand advertising, and Yahoo is one of them. Yahoo has half a billion users and traffic to its properties increased almost 20% through 2007. Ad revenue increased by about 18% in this same period. Does this look like "a company slowly spinning down into disaster"?



2. Strong, stable relationships provide unlimited upside. From its very inception, Yahoo has maintained good relations with the content partners without which its popular site would be an empty shell. Unlike Google, which seems to regard the owners of the content it replicates in its SERPs as "subjects," not partners, Yahoo treats these sources with respect in the form of licensing agreements. To obtain more traffic, it can license more content or bolt new features authored by outside developers directly into Yahoo. In effect, this model sidesteps one of Google's most nettlesome problems -- how to grow the number of searches, which is beginning to plateau. Yahoo may have incurred industry wrath when it proclaimed itself "a media company" during the tenure of Terry Semel, but its media/content licensing model offers better long-term growth potential than Google's.

3. Yahoo's current troubles are manageable. Without a doubt, Yahoo needs to trim the fat, especially in the growth of its general and administrative expenses, which rose an unacceptably high 23% in the year ending 9/30/2007. It needs to reduce the redundancies caused by its recent acquisitions, and there is no reason to believe that it will not do so. One thing that it should not do (and in my opinion, will never do) is dump its recently completed Panama project, which is only just starting to yield results. There is no need to apply a draconian solution to a problem which is a textbook case of organizational bloat. Whether Jerry Yang is up to the task is an open question, but I have no doubt that Yahoo will bite the bullet and become a more efficient operation in the year ahead.

I know it's out of fashion to buck the "Yahoo is dying" crowd, but I'm bullish on Yahoo's future. Every company has its growing pains and midlife crises, but Yahoo brings too much to the Internet to be written off as a has-been already. In my view, this company's best and most productive years lie ahead of it.

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