"People are asking, 'Is Yahoo seeing something bigger here, or is this their problem?'" said Pacific Crest Securities analyst Steve Weinstein. "My hunch is it's Yahoo. There's too much competition."
The threat of innovation
Ironically, the biggest threat facing Yahoo after years of pioneering new-media models is innovation, according to Forrester Research analyst Shar Van Boskirk. "Marketers have many more options for spending budgets than they did even a year ago," she said. "Video, MySpace pages, RSS, in-game advertising -- it's all cutting into display and search budgets."
While Yahoo offers many such options, Ms. Van Boskirk added, MySpace, YouTube and (fill in next year's hit start-up) offer increasingly refined alternatives and audiences. To stay competitive, Yahoo is rumored to be considering an acquisition of Facebook for about $1 billion.
The chief rationale for the deal, analysts said, would be extending Yahoo's online footprint. Facebook drew 14.8 million unique visitors in August, a respectable number even compared to rival MySpace's 55.6 million. The problem? Overlap. According to ComScore Media Metrix, Yahoo attracted 131.3 million visitors in August, while the total combined audience of Yahoo and Facebook excluding "site duplication" was 133.7 million. That leaves just 2.4 million Facebookers who didn't visit Yahoo for one reason or another that month.
Should focus elsewhere
David Hallerman, senior research analyst at eMarketer, said Yahoo would do better to concentrate on utilities such as search and communication tools rather than Facebook. "It could give them a quick boost, but Yahoo should concentrate on services that people will always need and use regularly."
Yahoo Mail, for instance, is a huge driver of revenue for the company. About four in 10 online display ads were placed within the service in August, according to Nielsen/NetRatings AdRelevance. That's nearly three times the ad volume pulled in by its closest challenger, MySpace.
Research firms are split over the broader implications of Yahoo's announcement. Forrester, for its part, is sticking by its prediction that online ad spending will reach $17.4 billion this year and grow to $26 billion by 2010. EMarketer, on the other hand, is busy revising its growth estimates, which it plans to release today. EMarketer had previously expected online ad spending to reach $16.7 billion this year, up from $12.5 billion last year.
Yahoo CEO Terry Semel, speaking at a Goldman Sachs conference last week, blamed its woes on the automotive and financial-services categories. As a result, said Yahoo Chief Financial Officer Sue Decker, third-quarter sales will come "in the bottom half" of the $1.1 billion to $1.2 billion estimates given in July. "We are starting to see some advertising weakness in some of the most economically sensitive categories," Yahoo said in a filing last week.
Still expecting strong year
That's not to say Yahoo isn't expecting a strong year. "We're continuing to see double-digit growth in every category, including automotive and financial services," Yahoo Chief Sales Officer Wenda Millard told Advertising Age. "We're susceptible to changes in economic conditions like every company, but when earnings come out, everyone will be happy."
Ms. Millard recognized what a rough year it's been for Yahoo's investors, with shares down 35% from a 52-week high of $43.66. But she insisted stock price was not a reflection of health. "Wall Street is very, very focused on one metric, RPS [revenue per search], and they're not going to budge until we release Panama and it's successful."
Panama, of course, is Yahoo's revamped ad-placement system, which was delayed until the first quarter of 2007 because its technology was not prepared to challenge Google's offerings.