Yahoo reported yet another depressingly weak quarter. The Q1 2007 earnings conference call is a litany of lame excuses as to why Yahoo can't perform.

One thing Yahoo is good at is plying an excuse. This time it's "Wall St. got ahead of itself on Panama." Of course, no mention of their trick last quarter, bogusly hyping Panama by saying they were launching it "earlier than expected".

The story with Google is getting simpler - each quarter they mint $1B in profits by sticking to traffic and search growth, while having a global, diversified ad system that prints the money.

Meanwhile Yahoo's market share has not grown in the past 3 years.

Yahoo!’s market share has been flat and steadily eroding over the past 4 years, while Google’s has dramatically accelerated. Yahoo! had a 28.9% share in February 2003 (according to Neilsen NetRatings ), compared to 29.5% for Google. However, Yahoo!’s share had dropped to 19.5% as of December 2006, and Google’s had increased to 65.4% (according to Bank of America Equity Research).

In a blisteringly accurate critique, seeking alpha columnist Eric Jackson lays out the reasons for Yahoo's failures, with the money quote being:

Google has grown its shareholder value 21 times more efficiently than Yahoo! over this time period, when the Internet ad market has been booming.

It's a theme repeated over and over. While Yahoo claims to be "leveraging it's audience insight" in order to "be in position" to capture "the growth of the internet", Google has ACTUALLY done it. Yahoo has dithered.

EVERY earnings call for the past 3 years has included Terry mumbling something similar to:

“We are on the cusp of witnessing a significant increase in engagement of consumers on the Internet and believe we are best positioned to capitalize on the many opportunities to which we are exposed.”
from the Q1 2005 call

Unfortunately, the fact is that Yahoo has performed worse and worse since then. Google has eaten their lunch. Even Ebay is coming back stronger than Yahoo.

Part 1: They Were Asleep at the Search Wheel

It's bad enough that Yahoo blew the chance to buy Google, but far worse is the fact that Yahoo wasn't even AWAKE on search strategy until it was too late. There were 3 key failures:

• Failure to focus on search share - instead Yahoo wanted "deep user engagement" and invested heavily (i.e. $500M+) in Hollywood type media with the Yahoo Media Group.
• Failure to focus on search monetization. Management let the Panama delays stretch to 2 years, losing billions in revenue and never setting the ship right at Overture.
• Failure to grow audience. Market share in Yahoo's non-search properties has been flat for the past 3 years.

What has Yahoo done well? For a while, their display ad business was covering for the lagging search ads. No more. In Q3 2006, Semel warned of weakness in Finance and Auto sector display ads. Unfortunately, no matter how good display ads do, they are sensitive to seasonal and cyclic economic factors - more than search is. They can't make up for the loss of share and revenue on the search side. That's partly why the last few quarters haven't looked very good for Yahoo.

Yahoo's Problem is Leadership. Semel.

Note the difference a year makes in Terry's opening earnings call summary:

Q1 2007:
"We have been executing aggressively against our plans to improve our search monetization, strengthen our display advertising business, and seize the opportunities we see in emerging areas like social media, mobile and video."

Q1 2006:
"The strategy that we have talked about for the last couple of years, to lead the shift from mass media to my media is starting to coalesce and the next phase of Yahoo! is becoming much more visible. You can see it through the continued development of communities on our network, the expanded programming of head and tail content and the evolution beyond web search to social search. All while providing personalized services for our users whenever and wherever they are."

In 2007 it's all about search. Only one year ago, search is barely mentioned. Media, Community & Personalization was far more important to Yahoo at the time. Terry talked about moving "beyond web search". HA! Somehow I hope he didn't mean that Yahoo would be losing market share in web search... but that's what happened.

As I've written before, Semel doesn't have the technical chops to lead Yahoo, he was brought into to make Yahoo into a media company. (BTW, did you notice that the Dreamworks studio - the much ballyhoo'd Spielberg, Geffen & Katzenberg collaboration was recently sold for a mere $1.6B? - that should indicate why Yahoo CAN'T be a media company.)

Basically, Yahoo has been pulled into a war they didn't want, with a much more focused and powerful enemy. Semel doesn't have the ability to fight that war.

Why Panama isn't the Answer

Panama is not enough. It is worse than Google's current system in EVERY WAY. It's harder to use, it has worse ROI, the inventory isn't there, and it isn't a global diversified ad system - one that has search, content, and many other forms of advertising built-in. Google has all of that. Yahoo could have that in maybe 5 years...

From a channeladvisor post on initial Panama results:

For example, we have a number of clients with strong national brands. Actual CPCs on Google for these brand terms are $0.01 to $0.06. On Yahoo, the CPCs on the same terms are at least $0.10. So, even though Yahoo sometimes has a higher conversion percentage on those terms, ROI on Google can be two to three times or more what it is on Yahoo (using return on ad spend—ROAS—as the measure of ROI). And, because retailers with strong national brands drive a large percentage of their paid search sales through brand terms, brand term ROAS is a significant contributor to overall ROAS. As a result, overall ROAS on Yahoo is lower.

Beyond ROI, Panama has 3 key problems:

1. Yahoo's inventory is weak - due to declining search share - 30% to Google's 60%.
2. Panama's not rolled out anywhere but the US and Canada
3. It's technically 3 years behind AdWords in functionality.

So Panama, for the rest of the year can be expected to be blamed for disappointing results like it was this quarter. It's not the answer.

Moreover, Yahoo announced a re-org late last year. They still haven't been able to hire an executive in charge of "audience", and this quarter's results pretty much bear out what the consensus was on the re-org: "Deck chair shuffling".

What about Microsoft?

The only internet related company performing worse than Yahoo at this time is Microsoft. If Panama hasn't lived up to hype, Microsoft's search and AdCenter products have been total, complete miserable failures. Full of spam, and losing traffic daily, despite huge platform advantages (IE7) that should have propelled them higher.

So it's now possible that these two failing companies will get together, with Microsoft wanting to buy Yahoo to compete with the new boss: Google.

That would be a complete disaster. The only good thing would be getting rid of Terry Semel. However, Microsoft is more lost than Yahoo, and folding Yahoo's 12,000 strong workforce into MSFT's 73,000 people would pretty much kill any chance Yahoo has of growing into competing with Google.

Is There Any Hope for Yahoo?

If Yahoo had a technical leadership injection, it could get back into the game. Things are broken, and Semel clearly can't fix them, but Yahoo does have some strength.

Certainly Jackson's recommendations - designed to get Yahoo's stock back up, mostly should be considered:

• Terry Semel, Robert Kotick, Roy Bostock, Ron Burkle, Eric Hippeau, Arthur Kern, and Gary Wilson should be Immediately Replaced on Yahoo!’s Board of Directors.

However, I think the key to Yahoo's recovery is to figure out how to get advertisers to split their budgets closely between Google and Yahoo.

Yahoo mainly needs more inventory. They need to copy Google's strategy of being the ad system for ALL media by 2010. They need to be able to say to big advertisers: "We can give you better deals, better service, better reach than Google."

It's possible to say that because Google is on it's way to becoming incredibly dominant, and it has no shortage of arrogance in dealing with customers. Eventually it will screw up, and piss off big advertisers. Yahoo already has relationships and it could prosper as a strong #2.

However, the likely scenario is probably Microsoft buying Yahoo.

In that case, you should load up on YHOO stock now, in hopes that you get 30%+ premium over the next year on the buyout. And you should buy GOOG like crazy too. Because if Microsoft does win Yahoo, the combined incompetence will ensure that Google ends the biggest winner of all.

Labels: 2007, google, q1, semel, yahoo

¶ 4/20/2007