Yahoo Wrestles With How to Grow While Pleasing Investors

Needs to Find Its 2.0 Mojo; Online Display Won't Cut It Today

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NEW YORK ( -- Yahoo needs to find its version 2.0.

Though it's built a $5 billion-plus business with incredible reach, a diverse stable of services and strong revenue-growth rates by most media-company standards, Yahoo took a drubbing from investors following a drop in third-quarter profit and a warning that the fourth quarter would be weak too. CEO Terry Semel blamed a delay in the rollout of its Panama search platform and soft spots in the online display-ad business.
Yahoo CEO Terry Semel. Some have questioned whether there is visionary leadership at the internet giant.
Yahoo CEO Terry Semel. Some have questioned whether there is visionary leadership at the internet giant.

But the truth is that display-type ads are unlikely to strengthen in the future, and the real reason Wall Street is falling out of love with this former darling has more to do with its failure to keep up with the hottest properties in next-generation online advertising: social-networking sites and online-video providers. "It's about increased competition in their space," said David Cohen, exec VP-digital media at Universal McCann. "Instead of the mass play that was Yahoo, MSN and AOL, there's now a whole host of new opportunities."

More customization being offered
Another way of looking at it is that planners and buyers are warming up to more pitches from more diverse offerings, and marketers' increasing but still finite online dollars are being spread more thinly as a result. Jeff Malmad, MediaCom's director-digital media, said the smaller, more entrepreneurial-minded web publishers tend to offer more customization. "In today's world agencies are pitching ideas as opposed to ... saying to Yahoo: 'We want to reach men 18-34 on Yahoo. What do you have?"' Indeed, display advertising, an area in which Yahoo has long touted its leadership, is seeing growth taper off. It was up only 13% in 2005 after two years of rising at near 20%, according to TNS Media Intelligence.

"They have to retool the way they think about advertising," said Ryan Magnussen, CEO of RipeTV, a creator of online on-demand content. "Advertisers are less interested in banner ads and more interested in clickable targeted search and the innovations in video on demand."

Yahoo has invested in some social-networking sites -- Flickr and are the two most high-profile -- but with public companies, perception is everything, and perhaps more important are those that got away. So while Yahoo executives are quick to sing the praises of their social-networking initiatives, the company is seen by many to be lagging in this key area. Losing out to rival Google for YouTube and its inability to close a deal with social upstart Facebook hasn't helped.

"Yahoo missed the boat on social networking," Stadia Capital analyst Christopher Connor told Advertising Age a week before the company's earnings announcement. No one is yet calling for heads, but some have questioned whether there is visionary leadership at Yahoo. One internet-advertising executive close to Yahoo said the company had set unrealistic internal sales goals of 40%-plus year-over-year increases -- but upper management didn't want to hear it. Yahoo had no comment on its sales goals.

Bold steps needed
The message Yahoo is giving to employees is that it's confident in the talent it has in place, the jobs they're doing, and the company's assets and direction. One Yahoo insider, however, echoed the sentiments of several online executives outside the company: that bold steps need to be taken to turn around the perception of a company on the ropes.

Universal McCann's Mr. Cohen said the 2007 battleground will be original programming. Of course, it was only recently that Yahoo put the brakes on its ambitious plans to create Hollywood online, led by former Disney TV executive Lloyd Braun. "There's a difference between 'Do we spend $100 million on a studio or crawl, walk and then run?"' Mr. Cohen said. "And it's about timing. What was not OK a year ago is OK today."

And then there's search, which will play an important role in proving Yahoo can compete with Google. Incidentally, Yahoo's stock peaked in first quarter 2000 -- the same quarter in which Google sold its first ad.

Still hope
Google's platform is more efficient for big brands, said Bryan Weiner, president-chief operating officer of search-marketing firm 360i. "Given the surge this year in search spending by these big brands, the lion's share of the revenue is going straight to Google," he said. "As Panama starts rolling out to large brand advertisers early next year, we expect that to help Yahoo a lot."

Despite Yahoo's pummeled stock and battered reputation, there are still those holding out hope. "The market reacted to earnings," said Jonathan Rosen, former head of search strategy at AOL. "What [Yahoo is] doing right now makes sense."
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