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

In fact, the earnings call WAS pretty boring, with the Google team practicing serious message discipline, everyone emphasizing that they really DO CARE about search and especially advertisers.

Gross revenue increased 63% over Q1 of last year to $3.7 billion. Revenue from Google properties was $2.3 billion, representing strong year-over-year growth of 76%. We experienced healthy traffic growth in our Google.com business both domestically and internationally.

Now turning to cash flow, operating cash flow was strong at just over $1.2 billion. Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, increased to $623 million.

In the tradition of Arsenio Hall, here are some thoughts - things that make you go "Hmmmm".

• Quality Score is working. It means Google is showing fewer ads per page that are "worth more".
• They said paid clicks on Google and its partners' sites rose 52% from a year ago. Wow.
• Google spent $597 million dollars in capital expenditures- mostly on servers and data centers. I think the technical term for that is: "shitload". Seriously, it probably equates to something like 250,000 servers.
• Fast growth in UK is coming from attention to big "named" accounts and a successful sales team. Interestingly, the Google team thinks that rapid UK online ad spending growth may stem partly from the more limited TV advertising landscape in the UK (i.e. the BBC doesn't soak up as much ad spend as the US networks)
• Toolbar users search more - a lot more. Google has been very successful in toolbar distribution
• Google has deals to show ads on 15 of the top 20 social networks in the world.

Overall, three things really strike me: 1) Google is making a lot of these gains with big advertisers. 2) Unlike Terry Semel, who says that Yahoo is "well-positioned to take advantage of future internet growth", Google is actually taking advantage of current internet growth in a massive way. 3) Google looks insanely strong internationally. By comparison, Yahoo's over-hyped Panama ad system is NOT live in any countries besides the US and Canada.

Even though every analyst currently has "buy" ratings on Google, which doesn't leave a lot of room for upside surprises, Google's financial performance and increasing dominance should be able to power the stock through the $500 - $600 level.

Labels: 2007, earnings, google, q1, yahoo

¶ 4/19/2007

Google will build a avatar enhanced social / virtual world with 3-D Graphics.

Why do I think they would they do this? If you watch certain Google Tech talks, it makes sense that they'd have some Second Life envy. Google also would like to build services that are popular with the kids, i.e. the 15-22 year old demographic, which is one of their weaker areas.

When this service comes out, it will probably be panned, and disliked by the cognosceti who think Google should stick to its knitting. But I think advertising in virtual worlds is something they will want to figure out.

Labels: 2007, avatar, google, predictions

¶ 1/04/2007

Behavioural Targeting (or BT) is simply the ability to show you ads based on what you do (your behaviour) on the web.

The Wall St. Journal has an article discussing Microsofts attempt to use behavioral targeting in combination with search ads:

If someone types in "compare car prices" on Live Search, Microsoft's computers note that the person is probably considering buying a vehicle. The computers then check with the list of Hotmail accounts to see if they have any information on the person. ... Microsoft says that in testing in the U.S., behavioral targeting increased clicks on ads by as much as 76%.

Microsoft doesn't really matter much, especially in search. The biggest player in BT is Yahoo!, since they have the most email users and a broad network of content sites. Google could start to do it more as well, mostly based off of your search history, though they've mentioned they won't use it with AdSense. Tacoda is the best known, and probably biggest 3rd party ad network which touts BT more than anyone else.

Behavioural targeting is important because it works and when you have a huge database of peoples interests from their click stream and email, you can really improve ad response rate. In 2007, you should see a lot more offerings, a lot more proof that it works, and the price should go up a lot too!

Labels: 2007, advertising, predictions

¶ 12/28/2006

2007 will see mass consumer adoption of smart phones (i.e. More than 5M units sold). These are cheap blackberry clones - phones with mini keyboards.

In the US, this trend will be the thing that puts mobile apps on the map.

Why has it taken so long? The main barriers have been cost, screen resolutions and 3G networks. All those are now solved.

These trend-creating devices cost about $200, and will enable mass adoption of texting, mobile email and creative mobile applications. Examples of these phones include:

• Samsung Blackjack
• Motorola Q
• Nokia E62
• Blackberry Pearl
• Treo 680

Paul Kedrosky recently posted some stats that 2M BlackBerrys out of 7M total sold are in the hands of consumers, rather than business people.

This is my most obvious and sure-fire prediction for 2007, and it will have a huge impact on the way the whole internet is used over the next 3 years.

You are hereby behooved to get one of these phones or risk missing out on the next big phase of consumer web, social networking and search development.

Labels: 2007, mobile, predictions

¶ 12/22/2006