Economy hampering Yahoo!'s global goals

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The world's most popular portal, Yahoo!, has for years enjoyed a smooth ride as the darling of both analysts and the media.

But the U.S. Internet company has hit several bumps recently that threaten to derail its global expansion strategy, including a general slump in U.S. high-tech stock prices and the loss of key executives in Europe, Asia and North America as well as the possibility of a hostile takeover.

Last week, the company downgraded its financial outlook for first quarter 2001 and announced that Tim Koogle, will step down as CEO, retaining the position of chairman.

The downgraded forecast was blamed on a "weakening macroeconomic climate, and the resulting shortfall in marketing spending by customers due to the economic uncertainty." The company predicts first-quarter 2001 revenues will fall between $170 million and $180 million-far below analysts' already-diminished $232.6 million consensus estimate from FirstCall/Thomson Financial.

"All businesses in the United States are facing challenging economic conditions that have weakened further in recent weeks, and as consumer confidence and spending has deteriorated, a broad range of customers have delayed their spending across all media formats until their economic outlook improves," explained Mr. Koogle.

Yahoo! has ambitiously expanded overseas since David Filo and Jerry Yang started an Internet guide as a hobby in April 1994. Today, it has 24 Web properties and offices in Europe, Asia, Australia and Canada. Yahoo! reaches more than 120 million users each month worldwide, making it the most popular Internet portal in terms of traffic as well as a top global brand.

In the nine months ending September 30, 2000, ad revenue was $723 million, a 105% increase compared with same period in 1999, but online advertising sales from outside North America have fallen short of expectations.

Nearly half of Yahoo!'s traffic comes from outside the U.S., but just 16% of Yahoo!'s revenues are generated abroad, far below the 33% that executives-and analysts-were hoping for.

Sensing trouble, Goldman Sachs, UBS Warburg, ABN AMRO, ING Barings, Prudential and other investors already downgraded ratings for Yahoo! in recent weeks.

"Only 10% of Yahoo!'s $1.1 billion [annual] revenue comes from Europe, despite the fact that it has 30% of the audience. The bulk of the operation is still in the U.S. and that is really where the focus is," observed Hubert De Marliave, a London-based analyst with West LB.

He warned that with a market capitalization that last week slumped below $10 billion, Yahoo! is ripe for takeover by another media or entertainment group, such as Walt Disney Co. "I think a takeover is likely to happen," he said.

David Card, senior analyst at Jupiter Media Metrix, added, "They don't have their own offline media business, which is a disadvantage in the slowing ad market. So it's possible that they could be acquired by a media company, but nobody knows for sure."

The warnings have prompted Yahoo! to take protective action. On March 1, the company's board adopted a shareholder rights plan "to deter coercive takeover tactics." The stock March 8 hit a low of $16.25, its lowest point since 1998.

Slow development of online advertising overseas is just one factor impeding the company's growth. For instance, in Asia's two biggest online markets, Japan and South Korea, Yahoo! made what some see as a short-sighted decision five years ago to operate through a minority stake in a joint venture with Softbank Corp. (Softbank also owns 30% of Yahoo!'s portals in the U.K., Germany and France.)

Japan accounts for 67% of the total online ad market in Asia, according to Lehman Brothers, but Yahoo!'s business there is treated as a portfolio investment, so its income is not included in the company's corporate revenues.

In China, where the company is forced by government regulations to operate through a joint venture, it has teamed up with a successful local computer company called Founder.

Even so, Yahoo! gets trounced by local Chinese portals such as Sina, Sohu and NetEase. It ranked sixth among home users in a recent survey by iamasia, and while the brand attracted 1.9 million unique home visitors, only two-thirds were visiting the local cn.yahoo.com site. The rest were surfing on Yahoo!'s U.S. site, provoking criticism that it lacks relevance for Chinese Internet surfers, which increase by the thousands every day.

"It's a question about insight into what local users care about," said King Lai, NetEase's CEO in Beijing.

Growing online ad sales and fending off hostile takeovers are not the only problems keeping Yahoo! executives busy these days. In the past month, it suffered an exodus by several seasoned executives, starting with Fabiola Arredondo, managing director of Yahoo! Europe. She quit on Feb. 15-just one month after she warned of a sharp slowdown in online advertising growth in Europe.

Yahoo! Europe declined to comment on her departure.

Her counterpart in Asia, Savio Chow, resigned hours later. He was widely applauded for Yahoo's acquisition of Kimo, Taiwan's leading portal, last November. But the slowdown in online advertising in the U.S. increased pressure on Yahoo!'s overseas executives, including Mr. Chow, who was already under fire from analysts (and even some senior staff in Asia) for his low profile and Yahoo!'s dismal performance in China.

"Everybody's scratching their heads asking `Who's left?' over there. I've talked to my colleagues in the investment community, and nobody knows what's going on. It does cause one to scratch one's head and wonder about the timing," said Lanny Baker, an analyst at Smith Barney in New York.

In fact, the portal is left with just one overseas regional manager, Robert Alonso at Yahoo! Latin America, working with Heather Killen, senior VP-international based in Santa Clara. Ms. Killen declined to comment.

Mark Rubinstein, managing director of Yahoo! Canada, quit in early March, while Dennis Zhang, Yahoo!'s general manager in China, quietly left the company earlier this year and Jin Youm, CEO of Yahoo! Korea, will leave at the end of the quarter.

For its part, Yahoo! has brushed off the resignations as "completely unrelated coincidences" using typical corporate jargon, such as "a desire to pursue other business opportunities" or "spend more time with family."

Mr. Rubinstein has been replaced by Michael Zara, Yahoo! Canada's head of business development for the past year, and before that a VP-general manager at oil services company Schlumberger.

No replacements have been announced for the remaining positions, but Yahoo!'s board is working with executive search firm Spencer Stuart & Associates to find a successor for Mr. Koogle.

Meanwhile, analysts say the company needs to restructure to get its business growth back on track, starting with a diversification of its revenue base to revive earnings growth.

Mr. De Marliave pointed out the bulk of Yahoo!'s income is still derived from advertising, even though ad rates have decreased significantly on the Internet.

"In Europe, 80% of deals are still done on cost per thousand page views. But the danger for Yahoo! is that in the future, more and more advertising will have an e-commerce link," he said.

Yahoo! is already heading in that direction with new initiatives, such as designing corporate intranets and charging users to access its auction site-with only moderate success. For example, a number of users simply stopped using the auction site when charging was introduced, although 200,000 did remain loyal.

But results like that will not be enough to fight off the wolves circling Yahoo!, including worried investors, a slowing economy and the recent management exodus.

Ms. Madden is Asia editor of Ad Age Global. Contributing: Margaret McKegney, Juliana Koranteng, Anne-Marie Crawford

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