Yahoo was on a roll with an unbroken run of 16 quarters in the
black and a soaring stock. Recent months have seen a falling share
price and a profit warning and rivals are waiting to pounce, writes
Stephen Phillips
Internet mega portal Yahoo has resoundingly cracked that most
elusive of dotcom business conundrums - how to actually make money
from the Web. The Santa Clara, California-based firm boasts the
rare distinction among its Internet peers of profitability; rarer
still, sustained profitability.
For the closing three months of 2000, Yahoo notched its 16th
consecutive quarter in the black, successfully parlaying the
estimated 60% of Web users visiting its multi-service website into
a booming advertising-based revenue model. Yahoo counts almost
3,500 advertisers and - based on its ability to offer clients
highly targeted access to the estimated 54 million people passing
through its portal each month - charges premium rates that hand it
one of the highest profit margins of any Internet business.
Nevertheless, while its financial credentials are the envy of
the 'dotconomy', Yahoo's competitive horizon is clouded by the
faltering fortunes of many Internet firms, which jeopardises a
major advertising revenue source. Meanwhile, the corresponding
collapse of investor confidence in Internet businesses has dragged
the price of Yahoo's shares down by more than 80% since the start
of 2000, devaluing the currency previously used to bankroll its
all-important acquisition strategy.
Others loom large
Furthermore, the looming presence of the recently merged America
Online Time Warner and Terra Lycos combinations, both pooling
Internet access services with a wealth of proprietary
market-leading content, poses a formidable threat that raises
questions about Yahoo's ability to compete on a standalone footing.
Meanwhile, Microsoft's lavishly funded Microsoft Network (MSN) is
snapping at its heels as the leading free search engine and source
of aggregated content.
Yahoo, founded in March 1995, was the brainchild of Stanford
University classmates Jerry Yang and David Filo. The
20-something-year-olds convinced venture capitalist Sequoia
Capital, whose offices adjoined their Silicon Valley campus, to
invest $2m (£1.4m) on the basis that the list of cool websites they
had compiled held commercial possibilities.
Sequoia brought aboard seasoned executive Tim Koogle as CEO to
add management steel to the founders' entrepreneurial flair, and
the quest was on for ways to cash in on what was the Web's first
online directory (followed soon after by one of the first
text-based search engines). The key was to transcend the limiting
idea of a portal as a mere gateway to the Web and transform it into
a destination in its own right, drawing enough traffic to function
as a viable advertising platform.
Building the so-called 'stickiness' factor entailed amassing
enough compelling content and services to keep users' eyes glued to
Yahoo's Web pages for as long as possible. To this end, the firm
embarked on a bold and opportunistic acquisition spree. Since
floating its shares on the Nasdaq in April 1996, Yahoo has used its
soaring stock price to snap up $10.7bn (£7.3bn) worth of
businesses.
Yahoo's original directory and search services now claim only
20% of page views with services such as free email, instant
messaging, scheduling, personal home pages, shopping, bill paying,
games and auctions serving as the primary drawcards.
During the week of 15-21 January, Yahoo drew 23.4 million
home-based visitors for an average 27 minutes, according to the
Nielsen/ NetRatings Web traffic survey. This ranked it the second
most popular site for home users after the paid-for proprietary AOL
network of sites, which counted 28.3 million visitors but logged
only 16 minutes per visitor. Among work-time Web surfers, Yahoo
came out top with 15.1 million visitors who spent an average 39
minutes browsing its services, versus second-placed MSN with 13.6
million visitors spending an average 30 minutes on its pages.
Yahoo's extensive reach is a marketer's dream, while its ability
to track the browsing behaviour of millions of visitors to its site
permits highly targeted advertising campaigns. Banner
advertisements can be served up to individual users based on their
inferred interests. In the case of 55 million of the 166 million
users that Yahoo tracks, the firm actually has explicit information
- voluntarily given in the course of transactions - about their
identities, home addresses and personal preferences. The Internet
affords a level of marketing precision not possible using more
traditional media, such as print and TV. Accordingly, Yahoo can
command rates of $156 (£107) per 1,000 impressions for premium
targeted advertisements - nine times the cost of a prime-time,
30-second slot on US TV.
The advent of broadband services opening up the possibility of
interactive TV, for instance, can only increase Yahoo's earnings
potential with advertisers. Forrester Research expects online
advertising spend to triple by 2003, and by 2004 total $33bn
(£23bn). Nevertheless, while advertisements have proved a cash cow,
analysts concur that Yahoo must wean itself off an over-reliance on
them to build a more stable revenue model.
Relying on advertisements for an estimated 70-80% of its
revenue, according to a recent report from US investment bank CIBC
World Markets, Yahoo dramatically scaled back 2001 earnings
forecasts in January, citing the impact of the dotcom downturn on
its core earner.
Executives jarred Wall Street analysts by warning that 2001
earnings would likely fall a gaping 25-42% short of the range of
their forecasts based on previous company guidance. "2001 will be a
transition year. We will respond to the global economic slowdown
and complete a realignment of our client base," says chief
financial officer Sue Decker.
Meanwhile, although Yahoo has reduced its exposure to volatile
pure-play dotcoms from 41% of revenue to 33% in the fourth quarter,
the bricks-and-mortar companies it is courting as preferred clients
are themselves scaling back advertising budgets amid the receding
competitive threat from dotcom upstarts.
While Yahoo already charges for premium services such as extra
storage capacity within its free email accounts, the decline in
advertising revenue expectations presents it with the tough task of
introducing charges for previously free services. The company
signaled such intentions in January, announcing it would charge
users to post items for sale on its auction sites. However, a
wholesale move to paid-for services is expected to encounter
resistance. "It will take a while for consumers to come round to
paying for many services," predicts Barry Parr, director of
e-commerce research at market researcher IDC.
Premier league customers
Nevertheless, Yahoo holds one important card up its sleeve in
its quest to diversify revenue. An estimated 70% of employees in
the 500 biggest US corporations log on to Yahoo, handing it ample
opportunity to tap a market considered more receptive than
consumers to paying for premium services. Analyst Derek Brown at
San Francisco investment bank WR Hambrecht & Co expects Yahoo
to build on the custom portals and broadcast services it already
sells successfully to corporations as it bids to increase
non-advertising revenue.
Yahoo's aggressive diversification is also driven by the need to
respond to stiff competition. As well as the ongoing threat from
Microsoft, the firm now finds itself stalked by two behemoths; AOL
Time Warner and Terra Lycos, both of which bundle Internet access
with exclusive content.
AOL's $106.3bn (£73.2bn) acquisition of media conglomerate Time
Warner, closed in January, buys the leading ISP exclusive rights to
a stable of properties, including US consumer magazines such as
Time, Sports Illustrated, People and Fortune, major record label
Time Warner Music, movie studio Warner Brothers and pay-per-view
cable TV channel HBO. AOL is banking on the pulling power of such
leading brands to persuade more subscribers to spend longer inside
its network of websites.
Terra Lycos, meanwhile, is a combination of Europe's
third-largest ISP, Spain's Terra Networks, and third-ranked US Web
portal Lycos. Terra's $6.5bn (£4.5bn) buyout of Lycos sets up a
global pretender to AOL's crown and a vehicle to drive traffic to
content and search tools competing with Yahoo.
The feeling that on its own Yahoo lacks the firepower to compete
with these new powerhouses fuelled speculation in January that the
firm was ripe for a takeover. Viacom, the owner of US TV network
CBS and the third-largest media entity after Disney and AOL Time
Warner, was named as a potential suitor, but the rumours came to
nothing.
According to Lowell Singer, senior analyst at San
Francisco-based investment bank Robertson Stephens, Yahoo's stock,
while deflated, is still prohibitively expensive for any media
company. But he doesn't rule out a future sale if Yahoo's share
price continues to tumble.
However, other observers argue that the mergers entered into by
its competitors may play into Yahoo's hands. "Yahoo may actually be
more relevant and valuable as an independent company representing
the largest distribution channel for other peoples' content," says
Brown. "AOL has the ability to distribute other people's content
but its likely bias will be toward Time Warner."
According to Parr, AOL Time Warner will be under pressure from
shareholders to tap synergies across its businesses; a mission it
has already embarked on, plowing resources into online promotions
of subscriptions to Time and new music releases from Time Warner
artists. Such endeavours pose the "risk of distraction [while]
Yahoo is free to think simply about improving its services", says
Parr.
Where Yahoo will need to be on its best mettle against the
competition is in the international (non-US) market, expected to be
a critical battleground over the next few years. Countries outside
the US offer all the rich pickings associated with untapped
markets.
Yahoo's go-it-alone international approach, spurning pacts with
local players (except in Japan) has so far served it well. The firm
counts a non-US audience several times that of AOL and experts
compliment it on an unprecedented global reach among Internet
brands spanning 23 local versions and 12 languages.
"The advantage of Yahoo's model is that it is not based on
access. This makes it easier to go into countries and customise
without worrying about how people are going to get online," says
Parr. Accordingly, the kinds of deals with local players struck by
AOL Time Warner and Terra Lycos, which have to sell access as well,
are at less of a premium.
Yahoo is banking that such superior nimbleness will enable it to
beat its rivals to the opportunities ahead.
What do you think of Yahoo's prospects? Is its business model
doomed to failure or is the poor profits warning just a minor
blip? Email us at e-business.review@rbi.co.uk
Time line: Yahoo Chronology
March 1995: Yahoo! Inc is born. The firm offers the first
online navigational guide to the Web
April 1996: Shares float on Nasdaq
1996 to 2000: Uses soaring stock price for acquisition
spree, festooning website with new services to draw traffic
1997: Clears first profit, beginning unbroken run of 16
quarters in the black
Mid 1999: Acquisition activity peaks with $4bn (£2.8bn)
splashed on GeoCities, a chat-room host and developer of personal
Web page tools, and $5.7bn (£3.9bn) paid for Broadcast.com to audio
and video webcast capabilities to site.
January 2000: Share price peaks at $237.50 (£163.44)
January 2000 to February 2001: Stock reels from dotcom
downturn, plunging 80% in value. Shares priced at $33 (£22.70) each
as of February 5
January 2001: Speculation that Yahoo will merge with a media
company to meet challenge posed by new AOL Time Warner and Terra
Lycos pairings. No deal materialises
January 2001: Yahoo warns that 2001 earnings will fall short
of Wall Street expectations by up to 42%
Company CV: Yahoo
Headquarters: Santa Clara, California
International Presence: Operations in 23 countries cross
Europ, Asia-Pacific, Latin America and North America
2000 sales: $1.1bn (£76m)
One-year growth: 88.6%
2000 net income: $71m (£49m)
Employees 1999: 1,992