Yahoo's $4 Billion Problem

That's How Much Money Facebook and Google Are Taking Out of the Display Market in 2012

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Plenty of Yahoo's wounds are self-inflicted, but two of the biggest reasons Yahoo isn't growing has nothing to do with former CEO Carol Bartz but will make things that much harder for her successor: Facebook and Google.

Carol Bartz
Carol Bartz Credit: Kipp Cheng

When Ms. Bartz took Yahoo's helm in early 2009, Facebook and Google were nursing only nascent display-ad businesses, nothing that resembled an immediate threat to Yahoo.

But two years later, Facebook is passing Yahoo in display-ad revenue. The social network is expected to earn $2.19 billion in ad revenue this year compared to Yahoo's $1.62 billion, according to eMarketer. A report in Reuters indicates Facebook is well on its way, having booked $1.6 billion in revenue -- including ads and virtual goods -- in the first six months of 2011.

Google, also a relative non-player in display ads in 2009, has blown out its display business with the help of YouTube, DoubleClick and its ad exchange. EMarketer expects Google to earn $1.15 billion in display in 2011. That's probably low; Google will give an update on its display business later today.

As hobbled as Yahoo has been over the years, this re-ordering of the online ad universe is momentous: It's the first time in the history of the ad-supported web that Yahoo hasn't been in the top spot.

When Ms. Bartz became CEO, Yahoo was so much stronger than its main direct competitors -- AOL and Microsoft -- that Yahoo liked to say it was actually competing for TV's ad dollars. Today, the big direct competitors are Facebook and Google, and the game has changed.

Granted, no one would mistake a "sponsored story" on Facebook with a big, branded ad on Yahoo; nor would anyone compare an ad on Google's ad network for a rich unit on Yahoo's own sites. They're different propositions entirely.

So yes, Yahoo is still the leader in the type of display ads that drive brand marketing. AOL's Tim Armstrong would no doubt love to be in Yahoo's position with a solid display business and an audience not dependent on a dying internet-access business. And display overall is now growing faster than search, meaning a new leader who can articulate a vision and a reason to work with Yahoo again could bring significant upside.

But each additional dollar poached out of the market by the two display insurgents is one that Yahoo will have a hard time winning back, no matter who replaces Ms. Bartz.

And Facebook's and Google's gains aren't the only fronts in Yahoo's war.

Display. Yahoo hasn't been communicating a compelling value proposition to advertisers for years. When Ross Levinsohn joined the company as head of Yahoo's Americas business earlier this year, he found out that the sales force was mostly selling pure scale, touting the size of its mass audience at the expense of its particular value or pushing integrated, custom ad programs.

Yahoo's scale story is obvious, of course, and its easiest sell. With 600 million monthly users it is mostly unmatched in the display world, except perhaps for Facebook. The harder part is trying to engage brands on a higher level, getting them to spend more and, by implication, get more in terms of connections with Yahoo users.

Search. Yahoo's search revenue is falling off a cliff due to its search deal with Microsoft, one of the most complex global tech integrations ever attempted on the web. Yahoo maintains its own search experience and ad sales under the deal, while Microsoft handles the tech back-end. Yet several the several hundred million dollars that Microsoft has spent marketing Bing has succeeded mostly in taking share from Yahoo rather than their joint adversary, Google.

Exchange. Three years ago Yahoo was the undisputed leader in auction-based display with its Right Media ad exchange, which hummed along minting cash. But since then, Yahoo hasn't innovated. Google's AdEx is now bigger in volume and likely in revenue as well. Google is able to take more revenue out of the display ecosystem because of its integration with the rest of its online ad infrastructure, built around DoubleClick. There are also a host of independent exchanges in the mix.

Video. Yahoo's video strategy is unfocused and consists largely of a few web shows, which do pretty well but don't have near the scale needed to compete for brand dollars. No doubt that 's why the portal has been kicking the tires on Hulu, which would bring a host of premium video to Yahoo, as well as deals with TV networks. Without some kind of new pact, Yahoo trails both Google and Facebook in views, is barely ahead of AOL in views, and isn't even in the top 10 for ad impressions, according to ComScore.

Mobile. Mobile is a big focus of Yahoo's head of product, Blake Irving, but here Yahoo is also falling behind as Google extends its search dominance to the phone (and buys Motorola Mobility) while other rivals are built from the ground up.

Vision. Ms. Bartz liked to scoff when asked to provide a concise strategic vision for the once-great portal, except that it should be all things to everyone on the internet. That and nebulous slogans like "It's You" and "Science, Art and Scale" seemed to mean everything and yet nothing at the same time.

Is it about tech? Content? Communications? Community? Data? The lack of a compelling story was annoying to analysts, scary to Wall Street and a killer to brands and agencies looking for reasons to actually spend money there. "They have a hodgepodge of different properties and capabilities but their value to advertisers is ambiguous," said Forrester analyst Shar Van Boskirk.

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