Running Header: YAHOO!: MORE THAN SEARCH
Dated: 24 October 2006
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This case study discusses why Yahoo! is more than a search engine, but a global Internet information services and advertising agency. It examines the company’s history, organizational structure and control systems, financial data, marketing plan, situation and SWOT analysis.
Yahoo! is more than a search engine, free email, photo storage, mapping services, or Internet chat provider; but a global Internet information services company and advertising giant. Yahoo! has been a corporate image of the explosive growth of the Internet and electronic commerce (e-commerce). The very basic pretense of Yahoo! focuses on providing Internet services essential to users and business alike (Yahoo!, 2006). Yahoo! also became one of the first “blue chip” Internet companies. In order to understand this, a historical glimpse at how Yahoo! originated, boomed, busted and remained a leader in the industry. It survived this correction due to its fundamentals, resilience, and strong business practice. Due to these basic concepts, Yahoo! remained unwavering in providing valued services to the Internet community. These valued Internet services created the bedrock in which its corporate image, popularity and financial success grew.
The company management will also be examined to show how the organization developed during its short existence. This will enable a better understanding of the founders’ original concept and how Yahoo!’s mission and values have matured in this relatively small company. Although it is a small company, it boasts the largest Internet user community in the world. This overwhelming success relies heavily on its brand identity, through which has built a popular and trusted social product. These social products drive consumers’ “eyes” which produce the value and earnings the company builds upon. By doing this, it pioneered the Internet advertising market.
Both founders learned in the beginning, a vast majority of people were willing to have ads in order to have the many of those services for free. Overall, Yahoo! has been a bedrock for the Internet generation. Now a recognized and leading web portal in 20 countries and content in more than 15 languages, the majority of people can recognize the purple and white Yahoo! trade mark and have utilized a number of its Marketplace partnerships and even more of its free social services like search, chat and mail (to name a few). Yahoo! shifted the growth paradigm as it created tremendous value with free services that were illogical a decade ago. As with any company; the strengths, weaknesses, opportunities, and threats it faces are both traditional and unique to its generation. Overall, the competition driving Yahoo! and the next generation of the Internet in the 21st century (Web 2.0) would leave Adam Smith proud seeing how the invisible hand works today.
Yahoo! began as a student hobby and evolved into a global brand that has changed the way people communicate with each other and access, share and create information. The two founders of Yahoo!, David Filo and Jerry Yang, Ph.D. candidates in Electrical Engineering at Stanford University, started their guide in a campus trailer in February 1994 as a way to keep track of their personal interests on the Internet. The Web site started out as ‘Jerry and David's Guide to the World Wide Web’ but eventually received a new moniker with the help of a dictionary. The name Yahoo! is an acronym for ‘Yet Another Hierarchical Officious Oracle’. In March 1995, the pair incorporated the business and met with dozens of Silicon Valley venture capitalists. They agreed to fund Yahoo! in April 1995 with an initial investment of nearly $2 million. Yahoo! launched a highly-successful IPO [initial public offering] in April 1996 with a total of 49 employees. (History of Yahoo!, n.d.)
The IPO valued Yahoo! at $848 million (Pitta, 1996). Four years later Yahoo! soared to a market value of $129 billion (Yahoo!, 2001, pp. 22, 36). Then a couple weeks later, the Internet bubble started to deflate and eventually popped. In 2002, Yahoo! suffered its lowest price and the real possibility of following numerous other Internet companies into bankruptcy, when its stock price briefly touched, a split adjusted, $4 a share (Yahoo!, 2002, p. 22). This down turn effectively wiped out $122 billion from shareholders and shook investor confidence. Although its present market value of $33.7 billion is still a fraction of its company high, the company’s strength and perspective has grown many times over (Quotes, 2006).
Yahoo!’s strength has been achieved through its organization. As Terry Semel stated in a 2002 interview with author and columnist Kara Swisher, “[the employees are] great, really, really smart people [with a lot of] enthusiasm” (2004). Its mission statement easily harnesses the enthusiasm and talent of its stakeholders:
Our [Yahoo!’s] mission is to be the most essential global Internet service for consumers and businesses. How we pursue that mission is influenced by a set of core values - the standards that guide interactions with fellow Yahoo!s, the principles that direct how we service our customers, the ideals that drive what we do and how we do it. Many of our values were put into practice by two guys in a trailer some time ago; others reflect ambitions as our company grows. All of them are what we strive to achieve every day. (What We Value, n.d.)
Further supporting this mission statement is Yahoo!’s easily understandable core values: excellence, teamwork, innovation, community, customer fixation, and fun (What We Value, n.d.). Both the mission statement and core values support the fundamental idea Yahoo!’s founders had in the beginning. Yang commented on David Filo’s vision in Fortune magazine: “David had it in his gut very early on that Yahoo! could ultimately be a consumer interface to the Web…” (Schlender, 2000, n.p.). In 2002, Yang added a marketing twist to Filo’s vision and stated, “Yahoo! does two things…feed and build customer wants” (Swisher, 2002, n.p.). Yahoo’s investment banker, J.J. Healy, stated a very important entrepreneurial philosophy, “build, buy, or rent” (Angel, 2002, p. 93).
In 2001, as the impending doom of the “dot com” bubble became a reality, Filo and Yang understood their company and their personal short falls. They and the Board of Directors wanted to see Yahoo! succeed, so they searched for a new CEO. In May 2001, the Board of Directors named Terry S. Semel as chairman and CEO. With this new executive Yahoo! gained Warner Bros. Entertainment Inc chairman and co-chief executive officer, and a person with 24 years of experience in building “one of the world's largest and most creative media and entertainment enterprises” (Management Team, n.d., n.p.). When Terry Semel entered Yahoo!, he quickly recognized its underlining business model as that of a broadcast network; aggregated content produced and provided to audiences for free. This broadcast model is what Semel knows best. Using the 24 years for experience from Warner Bros, he restructured and flattened the company's organizational structure to six business units, from 44 (Mullins, 2001). He later joked, saying “I don’t think even [General Electric] GE has 44 business units” (Swisher, 2002, n.p.)
Headquartered in Sunnyvale, California, Yahoo! has approximately 9,800 full-time employees throughout the world. Yahoo!’s organization is made from six units. These six units are made up by user and business services. These services are then divided both vertical and horizontally creating Yahoo!’s organizational matrix. The user services; search, marketplace, information & entertainment and communications & connected life produce the vertical pillars. While business services such as marketing services and advertising produce the horizontal bars.
Four of the six units in the organizational structure are found within user services. As stated previously, user services are subdivided within Yahoo! Properties and fall into four categories: Search; Marketplace; Information and Entertainment; and Communications and Connected Life (Yahoo!, 2006). Each of these divisions represent a crucial launching point for most users’ Internet experience. Search as a category is important because it often serves as the starting point for Internet navigation. The segment’s mission is to “provide the world’s most valued and trusted search experience for users, publishers, advertisers and developers” (Yahoo!, 2006, p. 5). Next, Marketplace focuses on offerings a location for users to start the process of seeking to “purchase products and services on the Internet and seeking to access free services on the Internet” to include but not limited to, shopping, travel, autos, jobs and personals (Yahoo!, 2006, p. 7). Information and Entertainment delivers content that is mostly available without charge to users and often provide the initial starting point for users experience on the Internet (Yahoo!, 2006). Some of the very popular Information and Entertainment locations are; Yahoo! Front Page (www.yahoo.com); My Yahoo!; Yahoo! News; Yahoo! Sports; Yahoo! Music; Yahoo! Movies; Yahoo! TV; Yahoo! Games; and Yahooligans! (Yahoo!, 2006). Finally, Communications and Connected Life segment provide a wide range of communication and content services to users and small businesses (Yahoo!, 2006, p. 10). Within this segment, the information and services provided extend past inherent Yahoo! Properties and bridge into strategic alliances. For example; mail, messenger, photos are inherent, but broadband offerings are through partnerships with AT&T (previously SBC) and Verizon.
Business services contain the last two units of Yahoo!’s organization; marketing and advertising. These two units also construct the horizontal bars of the organizational matrix. As these two units work dependently with one another, they span all of the user services. They provide businesses a full range of marketing and advertising models.
There is ongoing growth in the advertising market and an increasing shift in advertisers’ use of online media as audiences shift toward the Internet from traditional media. [Yahoo! is] committed to capitalizing on this shift and helping advertisers create and execute Internet marketing solutions that both engage users to interact with advertisers’ brands as well as provide valuable insights into their customer base (Yahoo!, 2006, p. 4).
With over 300 million users, using Yahoo for marketing makes sense. Yahoo!’s marketing services maximize the effectiveness of a companies marketing campaigns by optimizing advertisement formats and placement on Yahoo! Properties (Yahoo!, 2006, p. 4).
The advertising arm of Yahoo! started in the beginning with banners using a pay by impressions. “An ‘impression’ is delivered when an advertisement appears in pages viewed by users“ (Yahoo!, 2006, p. 4). In 2001, “Yahoo! announced that it has hired Overture Services Inc., of Pasadena, to develop its paid search placement service until it can develop its own” (Mullins, 2001). The Overture decision was instrumental because it opened up an entirely new revenue stream, paid placement. Paid placement allowed marketers and advertisers a like to have their products and services appear along algorithmic search listings, or as links along side of traditional content. As users “click through” the paid placements, the company earns revenue. The importance of Overture Services Inc, and the paid placement advertising was solidified in 2003 when Yahoo! purchased it for $1.52 billion in stock and cash (Yahoo!, 2003).
The purchase of Overture highlighted Yahoo!’s entrepreneurial philosophy but it was not the only strategic acquisition, alliance or creation as there were several others (see Appendix E). These philosophies are represented by the strategic moves to acquire Four11 and Inktomi along with the alliance with Alibaba.The purchase of Four11, allowed Yahoo! to launch itself as a premier webmail and instant messaging provider. Additionally, Four11 provided Yahoo! with several directory services, including e-mail, phone and address listings, along with Internet-based communications services such as net-phone software tools. These tools became the backbone of the Communications and Connected Life category (Yahoo!, 1997). The 2002 acquisition of Inktomi provided Yahoo! with its own algorithmic search capabilities. More importantly, it allowed Yahoo! to steer away from its search partnership with Google. In 2005, Yahoo entered a strategic alliance with Alibaba, the top Chinese e-commerce and e-auction company serving over 20 million users (Alibaba, 2006). In this strategic alliance, Yahoo! turned over Yahoo! China, invested $1 billion and gained 40% ownership of Alibaba. The Alibaba alliance provided a significant entry into the Chinese market and produced an even stronger image of Yahoo! in the Chinese market because “Chinese Internet users have grown from just one million in 1998 to 111 million at the end of 2005” (Innovation Rising, 2006, p. 2). As reported by AsiaNow, this is significant because “Chinese users apparently prefer Chinese providers-the leading Chinese company claimed a 47% market share in search traffic in 2005, nearly twice that of Google” (2006, p. 5).
Although Alibaba allowed Yahoo! a successful foothold into China, it is has not come without some difficulties. Yahoo! sued the former head of Yahoo! China, Zhou Hongyi, for unfair competition and business practices. The lawsuit seeks $300,000 in compensation, from “Zhou's new forum content aggregator and search site, Qihoo” (Brennan, 2006, n.p.).
Most of Yahoo!’s strategic moves are accredited to its outstanding Board of Directors. Yahoo!’s Board of Directors contain ten people; two are internal to the organization, seven are independent operators and one is dependent. The two internal members are Terry Semel, Chairman and CEO, and Jerry Yang, Co-founder and Chief Yahoo!. The only dependent member is Eric Hippeau. Eric Hippeau is the managing partner of Softbank Capital Partners, an affiliate of Softbank Corp. (10-K 2004 Report, 2005, p. 32). Due to this Softbank Corp. has a voting agreement with the company, which entails Softbank to vote its shares in accordance with the voting recommendations of management. The other seven members bring a variety of business, entertainment and information technology knowledge and experience. The main issue with the current Board of Directors is the length of time they have served as board members. Three years after sitting on the board, members are considered fully vested (in stock options). Of the eight non-internal members, all but one has been on the board for over three years (Management Team, n.d.). This is worry some because they could leave Yahoo! at anytime.
Since Semel took the helm of Yahoo!, the company has been restructuring its self to become leaner and more capable to adapt to changing market conditions. Most recently, Hilary Schneider was appointed senior vice president of Marketplaces business unit (Delaney, 2006). Prior to this appointment, she was “senior vice president for media company Knight Ridder, where she co-managed the newspaper operations and led its online division” (Delaney, 2006). This move illustrated Yahoo!’s determination to build its User Services because “prior to Yahoo's reorganization, the individual Marketplaces businesses reported to several different areas of the company” (Delaney, 2006, p. B7). This movement may also telegraph future moves by Yahoo!’s Board of Directors. This “…could also indicate that Ms. [Susan Decker] is being groomed as a potential candidate to succeed Yahoo Chief Executive Terry Semel upon his eventual retirement” (Delaney, 2006, p. B7). Even if Terry Semel has contemplated retirement, his focus remains on strengthening and restructuring Yahoo!. The restructuring is not limited to only the organization and actions of the CEO but also to the current issue involving executive compensation.
Compensation Committee of the Board of Directors has approved a new retention and performance based compensation arrangements with its executive officers. In a show of belief in the company and abilities, the Chairman and CEO Semel agreed to take an annual pay cut to $1 dollar along with the discretionary annual bonus of 1 million stock options (SEC Form-8k, 2006). The best part about this change involves option pricing. The option price was set at the share costs when this was inked, $31.59. That is $7.17 below 13 October 06 closing and a touch above the 52 low (Quotes, 2006). The restructuring of the executive compensations shows strength two ways. First, Lawrence Kleiman in Human Resource Management discussed the benefits of profit sharing plans, as the employees’ pay is directly based on profits and the ability of the company to grow (2004). Second, it puts the Yahoo!’s financial practices in positive light after a number of companies have practiced stock option anomalies or the backdating the prices of options for executives.
By taking a deep breath and slowing down. Yahoo! has transitioned from a company with 66 business units pushing out 300 to 400 services a year to six business units releasing three or four great products a year. The employees, more than shareholders who tend to be short sighted, have embraced this restructuring. The flag ship products and services Yahoo! provides will at the very least maintain its double-digit growth and limited liabilities, as recognized by the 19% rise in quarterly revenue (Liedtke, 2006).
Yahoo’s financial status is very sound. The current Price to Earning ratio sits at 27.37 (Quotes, 2006). Additionally its asset returns are significant; revenue to assets sits at 49%, return on Assets and return on expenses rests around 18%. Additionally financial visibility can be recognized through more analysis’s of Yahoo!’s financials (appendices A – D).The common size analysis of Yahoo!’s 2002 to 2005 income and balance sheet (Appendices A and B) show management’s constant ability to grow and retain earnings. The long-term liabilities as a percentage of total assets have constantly decreased every year since it acquired long-term debt, from 13% in 2003 to 7% in 2005 (10-K 2003 Report, 2004 & 10-K 2005 Report, 2006). Current liabilities have remained in the preteens, from 11% to 15% with changes of a couple of percentage points every year. Current assets as a percentage of shareholder equity have increased over 20% since 2002. Finally, retained earnings in the analysis directly support the enormous growth numbers represented in the trend analysis. In 2002 retained earnings was (-.03)% whereas 2005 shows retained earnings to equate to 27% of stockholder equity. Therefore, for every $1 in equity, management retained $0.27 for future expansion.
Further exploring the income statement of Yahoo!, a couple of compelling facts arise. First, gross profits as a percentage of net revenue have steadily decreased since 2002, yet operating expenses have also decreased. Looking at 2002, gross profits were $790 million of $953 million or 83% and operation expenses were $790 million or 74% (10-K 2003 Report, 2004).By 2005, gross profits decreased to 60% a difference of 23% and operation expenses decreased 35% from the 2002 highs. The ability to lower operation expenses faster than the erosion of gross profits is one of the main reasons for the steady increase in retained earnings demonstrated in the trend analysis. Next, the other revenues and expenses has become a larger part of Yahoo!’s revenue generations. For the first time in 2005, income from operations dropped to 21% of net revenues and was no longer the majority contributor to the company’s financials. The main reason for this has been Yahoo!’s investment in global expansion (Alibaba). Finally, the percentage of net income to net revenues has constantly experiences double digit growth since 2002, in fiscal year 2005 it was a blistery 36% of net income to net revenues whereas 2002 it was a meager 4%.
A trend analysis of Yahoo!’s 2002 to 2005 balance sheet (Appendix C) looks like the progress of a delta rocket leaving the atmosphere. Yahoo! has experienced tremendous growth since 2002; assets increased 10 fold, from $311 million to $3.5 billion while liabilities only tripled from $411 million to $1.2 billion (10-K 2003 Report, 2004 & 10-K 2005 Report, 2006). With this 2 to 1 comparison, the prospects of Yahoo! seem steady and acknowledges why it survived the “dot com” bust. An impressive fact in the analysis of Yahoo! was its long-term liabilities. Before 2003, long-term borrowing was none existent. Since then, long-term debt remained constant at $750 million with a very slight decrease in 2005. Also in 2003, management started to invest in the company. Management “borrowed” $7 million from the company in 2002. After then, Yahoo!’s management retained an impressive $4 billion over the last three years. This was approximately 1,278% from its positive 2003 retention. This cash surplus not only showed the strength of Yahoo!’s financial management it also helped strengthen its financial leverage ratio of 1.3
The trend analysis of the income (Appendix D) again exemplifies explosive growth of the company and the success of management and the Board of Directors. Revenues and profit have almost experienced a 100% year after year growth every year since 2002, to the sum of $45.2 billion and $3.1 billion respectively. Expenses have also increased but the increase has been slower than profit growth, hence this enabled profits to outpace deficits. As expected taxes have eaten away at the increases, but that was expected and planned. Finally, "other" revenues have increased by 2072% times since 2002. This is slightly misleading since 2003 showed a marginal decrease of $21.8 million from 2002. The felt increase happened in 2004 when “other” revenues jumped 10 times 2003’s numbers. Looking at the past four years as a guide, the growth of Yahoo! has not waned at all, and the next couple of years should demonstrate its continued growth. Yahoo!’s share price has rested by its current price ceiling since the middle of 2004, yet its revenues have increased 147% and gross profit 142% (Yahoo!, 2006). This growth is not unusual since revenues and profit have almost experienced a 100% year after year growth every year since 2002, to the sum of $45.2 billion and $3.1 billion respectively. Yahoo!’s management retained almost $3 billion or 27% of assets in 2005. This cash surplus not only showed the strength of Yahoo!’s financial management it also helped strengthen its financial leverage to 1.27.
To understand Yahoo! financial bearing, compare it to two other Internet powerhouse pure plays that went public around the same time, eBay and Amazon.com. Looking at the last 4 years, Yahoo! has had the largest revenue and growth increase, 552% versus 375% and 216% respectively (eBay, 2006, p. 47 & Amazon, 2006). Additionally, it has had the largest price increase also. Yahoo! is one of the few companies not laden with debt. Yahoo!’s long-term liabilities is only 7% of assets whereas the other two are 7% and 41% respectively (eBay, 2006, p. 48 & Amazon, 2006).
In order to understand Yahoo!’s marketing plan, a situational analysis is vital. Yahoo’s market focuses primary on User Services as they directly affect Business Services. More simply, it’s Yahoo!’s ability to keep peoples “eyes” in its properties while inundating those same eyes with advertising. Although the concept is simple, Yahoo!’s ability to turn eyes into cash for its advertisers has been met by extremely fierce competition. As identified in the 2005 annual report, the three most significant competitors are “from Time Warner’s America Online business (“AOL” or “America Online”), Google Inc. (“Google”) and Microsoft (“MSN”)” (Yahoo!, 2006, p.14). Each of these three companies compete in one or more of Yahoo!’s markets. AOL and MSN are both successful portal destinations and are only ranked under Yahoo! as premium information destinations. Then MSN and Google, compete head–to-head in search and paid placement as number three and one respectively. All of its competitors offer information, communication, services and advertising. Yet only Yahoo! and Google are part of the Internet Information Providers Technology sector. Here, Yahoo! substantially trails Google in terms of market capitalization. At first glance, Google is valued about three times that of Yahoo with a market cap of approximately $130 billion versus $33.7 billion (Quotes, 2006). Looking at its financials though, Google has been growing faster than Yahoo! but not three as fast as the P/E and market cap tends to support. The revenue growth of Google from 2004 to 2005 was approximately 192% and net income 367% versus Yahoo!’s 147% and 226% (Google, 2006, p 41 & Yahoob, 2006, p. 59). Thus, the 45% and 141% difference is disproportionate to the share price difference. Meaning, either Yahoo!’s share price will increase substantially or Google’s will correct.
In 2001, CEO Semel’s mission was to diversify Yahoo!’s revenue so only 50% would be derived from advertising (Elgin, 2005). Since then Yahoo! has been striving to diversify its sources of revenue and break away from its dependency on advertising. As the 2005 annual report reported, over 87% of Yahoo!’s revenue came from advertising (Yahoo!, 2006). Marketing services brought in approximately $4.5M whilst subscription services earned a meager $664K (Yahoo!, 2006).
Although the mission to diversify Yahoo!’s revenue has not been ignored, strategic advertising deals remain very important. Earlier in 2006, Yahoo! and EBay announced an estimated $200M deal whereas Yahoo! will “provide graphic and search-generated ads” on EBay (Ryan, 2006). This is significant due to the head-to-head competition Yahoo! faces with Google, MSN and AOL in terms of ad dollars, since EBay is the largest consumer site on the Internet with over 100 million people buying and selling merchandises. Unfortunately, a few months later EBay inked a deal with Google to provide international online text advertising instead of sticking with its US supplier (Yahoo) (Reuters, 2006). This appears to be a new engagement in the global advertising environment since “in June 2006, Google revealed that it may shut down its Chinese websites…” (Innovation, 2006, p. 5).
Moving past advertising and building on its social products and User Services, Yahoo! introduced a new online question and answer service, Yahoo! Answers. This proved to be very successful, it “has become the second most popular Internet reference site after Wikipedia, according to comScore” (Hamner, 2006, n.p.). “In June, Yahoo Answers attracted 12.3 million unique visitors, a 35 percent spike from the previous month; during the same period, 947,000 people clicked on Google Answers, down 4 percent from May” (Hamner, 2006, n.p.). Adding to Yahoo! Answers success over Google answers is its costs, nothing as opposed to Google Answers where pricing starts at $5 and reaches the outer rings. Unfortunately, the battle does not end here, Yahoo! is trying to capturing and utilize next generation Internet (Web 2.0) growth.
Two years ago, the company hired Voce to help develop the online component of the influencer-marketing program. The plan was to monitor blogs, message boards and forums where Yahoo!'s products are commonly discussed and build a marketing plan to support it.
“Where Yahoo Search Marketing was concerned, some of those bloggers were advertisers or search marketing consultants, which gave the PR team some new perspective…Two years into the program, it appears that Yahoo has been able to reap the benefits of engaging this unique and growing audience. In fact, when it unveiled its online publishing platform, the Yahoo Publisher Network, the team first launched it as a beta product by bringing together a group of influencers to look at it, give feedback, and champion Yahoo's message in the blogosphere.” (Iacono, 2006, p. 9)
Yahoo’s newest promotion strategy focuses on a new advertising campaign aimed at younger and hipper users. “’One of Yahoo!'s top challenges is to keep young, fickle eyeballs glued to its site, and not risk becoming 'your father's Yahoo!,' ‘ Guzman & Co. analyst Philip Remek wrote in a report’” (Sanders, 2006, p. 41). Whether or not the campaign is successful is still being determined, but as Yahoo! starting to engage Web 2.0 sites.
Another marketing push focuses on Yahoo! contemplating purchasing a social-networking Web 2.0 site. “Sites like Facebook and rival MySpace have become the Web hangouts for a coveted market: young people” and is the focus of Web 2.0 (Buckman, Guth, & Delaney, 2006). Although Yahoo! has roughly 500 million users worldwide is has largely missed the boom in Web 2.0 social-networking sites. In March, Yahoo weighed a roughly $1 billion offer, to acquire Facebook. With the recent acquisitions of MySpace by News Corps for $540 million and YouTube by Google for $1.6 billion, Yahoo! is starting to fall further and further behind the Web 2.0 movement and a purchase looks likely (Siklow, 2006 & Bray, 2006).
Yahoo!’s SWOT analysis spans all the entire organization, its marketing plans, and future engagements. Appendix F provides a brief view of the strengths, weakness, opportunities and weaknesses effecting Yahoo!. Yahoo!’s strengths lie in four areas, a new search logarithm, new ad campaign, increased revenue from global markets, and global brand recognition. Yahoo!’s investment in a new search logarithm has been long in coming. After the company notified shareholders of a delay in the release of the upgrade, the stock suffered a 22% single day loss. (La Monica, 2006).
When Yahoo finally switches on the new search-advertising software code-named Project Panama…users of its search engine will hardly notice a difference. But if Yahoo's project was worth the two years and tens of millions of dollars it cost…users will find the text ads adjacent to the main search results just a little more interesting, luring them to click on those ads a little more often.
Those clicks should immediately turn into a lot more cash for Yahoo. It will not say how much. But Jordan Rohan, an analyst for RBC Capital Markets, estimates that if the strategy works, Yahoo will increase search-advertising revenue at least 20 percent right away -- about $125 million in the fourth quarter of this year and $600 million next year. That is a big impact from new software, and it speaks to the complex art and science of running a search engine. When hundreds of thousands of advertisers bid for the attention of hundreds of millions of searchers, little changes can have big results (Hansell, 2006, n.p.)
As addressed previously Yahoo’s newest promotion strategy focuses on a new advertising campaign aimed at younger and hipper users. “’One of Yahoo!'s top challenges is to keep young, fickle eyeballs glued to its site, and not risk becoming 'your father's Yahoo!,' ‘ Guzman & Co. analyst Philip Remek wrote in a report’” (Sanders, 2006). By doing this, it will strengthen the social base of the company and promote additional revenue growth for years to come and curb losses from Web 2.0 missteps.
Yahoo!’s globally diversified revenue growth illustrates another strength. Since Yahoo!’s CEO Terry Semel made it a mission to reduce dependency on ad derived revenue to only 50% , revenue increasing globally is vital (Elgin, 2005). Although ad revenue still generates the lion’s share of income, the company does earns 30% of its revenue outside of the U.S markets and leads it competitors in global revenue growth. (Yahoo!, 2006, p. 44).
Yahoo!’s final strength is its globally recognized brand. From its entry to the market, Yahoo! created a very successful brand image. The tagline, ‘Do you Yahoo?” produced such a marketing buzz, it became a way of life not a question. Additionally all of Yahoo!’s Global properties developed their own flavor of this tagline. Additionally, Yahoo! never sold its self-out to partnerships. Anything in conjunction with Yahoo! in its properties was branded Yahoo!. Take Yahoo! and SBC (now AT&T) joint communications venture, it is titled AT&T Yahoo! Broadband. Yahoo! branded the service while AT&T produces and maintains it. That is a significant strength!
Yahoo!’s weaknesses lie in two areas; reliance on U.S. for revenue and click fraud. Yahoo! has been striving to diversify its sources of revenue and break away from the dominance of advertising. In 2001, CEO Semel’s long-term goal was to diversify Yahoo!’s revenue so only 50% would be derived from advertising (Elgin, 2005). As of the 2005 annual report, over 87% of Yahoo!’s revenue came from advertising (Yahoo!, 2006). Marketing services brought in approximately $4.5 million whilst subscription services earned $664 thousand (Yahoo!, 2006). This is far cry from the 50% targeted by Semel in 2001. Weakening Yahoo! even more is the ensuing battle with click fraud. Click fraud represents a tremendous weakness to Yahoo! and its future financial growth potential. Ben Elgin and Brian Grow covered “Click Fraud – The dark side of online advertising” for the October 2, 2006 edition of BusinessWeek and reported “10% to 15% of ad clicks are fake, representing roughly $1 billion in annual billings” (p. 49). Although 10% to 15% is not a lot of money in the grand scheme of things, the losses suffered by business will cause them to select the advertiser that protects their investments and sue those that do not. As Marty Fleischmann commented in the article, "I told Yahoo years ago…If this was costing you money instead of making you money, you would have stopped this” (p. 53).
Yahoo! opportunities are vast has it has been investing in its future since the 2001 when the “dot com” bubble burst. Most pressing opportunities lie in two categories; partnerships and online video editing. The biggest partnerships with Yahoo! content have been with Acer, Hewlett-Packard Co (HP) and Bango. Acer computers “will distribute a PC start page with Yahoo as the default search service and provide a co-branded web browser toolbar under the strategic partnership established by the two companies” (Telecomworldwire, 2006, n.p.). As Acer ships PCs with the new start page and co-branded toolbar in Asia Pacific, Europe, North America and South America the probable number of “new eyeballs” will grow and increase Yahoo!’s global foothold and financial status. Adding strengthening its computer seller partnerships, “HP has agreed to feature a co-branded Yahoo/ HP Internet toolbar on HP computers”( Coventry, 2006). These partnerships make make Yahoo! the default service for the largest and fourth largest computer company in the world (Vance, 2006). Additionally, the joint venture with Bango will increase Yahoo!’s presence in the mobile computing arena, and starts a lucrative entry in advance Internet services, Web 3.0.
As social portals loose their luster, video portals have started to become one of the new gems of the Internet. Yahoo!’s recent deal with Bango and its purchase of JumpCut in September 2006, ought to leverage the company for the advancement and build on its positioning for Web 3.0.
Jumpcut plans to work with Yahoo's media and advertising partners to help create high quality content and stated on its website that it will bring video editing and remixing to all users with an Internet connection. It also plans to expand the ability for Jumpcut tools to be used to post on independent websites. (Telecomworldwire, 2006b)
A hinted acquisition by Microsoft and looming legal threats are the most significant threats Yahoo! faces in the near future. There have been a number of rumors floating around that Microsoft might attempt to acquire Yahoo!. One of Microsoft's major reasons for a possible acquisition is that MSN lags behind both Yahoo! and Google in search. ComScore puts Google's share just below 44%, Yahoo!'s share just below 29% and MSN's just below 13%; Appendix G illustrates this (Sullivan, 2006). Moreover, MSN has been losing market share. A combined, Yahoo! and MSN would have a share about equal to Google's 42%. Although this may seem slightly far-fetched but Yahoo!'s market capitalization has fallen to $34.5 billion. The company has about $2.5 billion in cash and short-term securities and $750 million in debt. This brings the cost to acquire the company to around $33 billion. Yahoo!'s twelve-month trailing revenue is almost $6 billion and cash flow from operating activities is approximately $1.7 billion. Therefore, Microsoft would have to pay a little over five times revenues and twenty times cash flow. Makes it seam slightly more probable and threatening. A side note, Yahoo! has an “Anti-takeover provisions that could make it more difficult for a third party to acquire [them]” (Yahoo!, 2006, p. 30). The provision allows the Board of Directors to issue up to ten million shares of Preferred Stock, thus without negotiating with the Board of Directors a hostile take-over is very difficult (Yahoo!, 2006, p. 30).
As if Microsoft is not enough, the probable lawsuits from a number of Yahoo! properties can erode future earnings and the company’s image. The 2006 acquisition of webjay, a music-sharing site, pending click fraud lawsuits, video copyright infringements from its video site, and conflict of interest lawsuits in global markets all pose a significant threat to the company and future growth potential.
Overall, Yahoo! started as a college project. The founders were wise to listen to the Board of Directors and hire a veteran entertainment executive in Larry Semel. Semel’s strategic leadership shaped Yahoo!’s organization design and created six business units in place of the 44 previous ones. Additionally, Yahoo!’s Board of Directors are well versed in business, management and technology. Additionally most have been on the board for well over three years, and have not made any indications to leave. Their stewardship has increased Yahoo!’s strength globally as it provides services in more than 15 languages in over 20 countries. Even as Yahoo! has fallen out of favor in the current stock market, its financial outlook appears solid, with double-digit growth potential in the coming year. The competition Yahoo! faces arises from every business unit, with some competing in all categories of business. Yahoo!’s newest marketing plan focuses on the search, information services, and advertising address the growing concern it faces from its competitors. By breaking into the Web 2.0, Yahoo! may attract the young, hip crowd. Even if it misses the majority of Web 2.0, it is already positioning its self for the next generations of the Internet, Web 3.0. Yet with all strengths and opportunities, Yahoo! must remain conscious of significant weaknesses and threats it faces in the current environment and the future environment. Although many equate Yahoo! with only search, Yahoo!’s company model represents global a strong, surviving Internet information services company and global advertising agency.
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– Updated Search Engine
– New Ad Campaign
– Global Income Diversity
– Brand Recognition
– Reliance on US Revenue
– Click Fraud
– Video On Demand
– Online Video Editing
– PC Partnership
– Mobile Partnership
– Microsoft Acquisition
– Legal Threats