Implications of Yahoo! Underwhelm

  The key question is whether the revenue deceleration (from 51% in Q2 and 46% in Q3 to 39% in Q4) is:

1) the result of a broader industry slowdown, in which case Google is screwed, too, or

2) the result of Google eating Yahoo!'s lunch, in which case Google will probably have another strong quarter or two.

In any case, the global online advertising industry no longer seems to be growing fast enough to justify the sector multiples--Google's included.  One lesson from 2000 is that, when the rest of the industry is grinding to a halt, the market leader can't keep going like a bat out of hell forever, no matter how much share it steals.

Comments

[Mack D. Male]

Yahoo made a lot of acquisitions at the end of the year - perhaps the decline in revenues was a result of changing focus in addition to any industry slowdown?

[Boomer]

Imma gonna jump on the GOOG short tomorrow!

[JD]

Amen brother!!! Google is going to resemble the freaking Hindenburg before long.

[Ryan TF]

It's likely that GOOG took market share in search queries. In Nov. GOOG had 39% of the market, gaining 5% more than a year earlier.

[Salim]

Henry, as to your post... I think #2 is closer but in my opinion, it is a combination of Google eating Yahoo's lunch as well as Yahoo not being able to eat its own lunch.

Well all know that Yahoo is run by Hollywood media types verses Google's techies. Yahoo still has a lot of gravity because it was a blue-chip internet stock in the past, but let's face it, while Yahoo is a "good" company, it has been a distant second to Google for a long time, particularly in regard to technology. This is obvious when looking at their relatively poor search monetization metrics, and while they are working to "fix" search monetization, the "fix" has taken too long and has been repeatedly delayed.

It is inevitable that search growth slows but I'm not yet convinced if this is happening today. For this quarter, at least, I bet that Google laughs at Yahoo and reports another blowout.

[Patrick Chu]

From my narrow focus as a somewhat substantial seach advertiser (several thousand a month total), Google's minimum bid of 1 cent beats the heck out of Yahoo/Overture's 10 cent minimum. At 10 cents, some advertising (including ours) becomes impractical, and Yahoo is basically ceding all these low-yield accounts to Google. We only have an account on Overture because we have bids grandfathered back from the Goto.com days (2-5 cents a click), listings that I haven't changed in years.

I think the key that will differentiate Google's and Yahoo's future performance is how search advertising performs in the future. If it grows, Google will benefit (they get about 90%(?) -- don't quote me -- of their revenues from search), whereas Yahoo is less dependent on search revenues (30%, I think). Yahoo makes about 20% of revenues from user fees which will cushion it from any slowdown in search advertising. On the other hand, if search advertising continues to grow, then Google will benefit far more than Yahoo.

It's amazing how sensitive these stocks are to any bad news. Yahoo missed estimates by a penny, and was down 12% in pre-open trading. Even Google was down 4.5% pre-open in sympathy. The market seems to be showing some nervousness about the multiples of these stocks, supporting what Henry is saying in his posts.

[Patrick Chu]

More thoughts about Yahoo--

Back in 1999 when Yahoo search results were REALLY getting bad (dead links everywhere), I thought to myself, if they ignore their search feature and concentrate on "content", what does Yahoo really have that's unique to Yahoo? When you think about it, very little.

Yahoo was early to the game and they have users (like myself) who have personalized parts of the site and continue to visit, but since they mainly license information from other places and have features that can be found in other places, what's to prevent another company (Google for instance) from licensing the same information, even to the point of providing similar look and feel? Nothing at all. IMHO, they're coasting on past glory, but I'm not optimistic about their long-term future.

Here are some stats from an August 2005 Red Herring article:
http://www.redherring.com/Article.aspx?a=13018&hed=No+Time+Lost+on+Search

Stats as of August 2005:

Time spent on Yahoo:
42 percent on Yahoo Mail
22 percent on Yahoo Messenger
2 percent on search

Unique users:
For Yahoo (118 million):
55 percent use Yahoo Mail
19 percent use Messenger
55 percent use search on Yahoo

For Google (80 million):
89 percent use search
6 percent use Gmail

--------

When you look at the numbers, it looks like Yahoo Mail is more successful than Gmail, but I have an account on both, and Gmail is a far better application. I think if you were to start a new mail account today, you'd choose Gmail. Over the long run, Gmail will add users while Yahoo Mail/Messenger will lose users. In fact, the same Red Herring article says that Yahoo Messenger was losing 200,000 unique users PER MONTH over the previous 12 months before the article was written in August 2005.

So if the long term future of Yahoo Mail and Messenger is losing customers, what else do they have? What unique content do they have? I can't think of any of their applications (games, music, mail, video, maps, news) that are best of breed. I visit Yahoo every day to read the news, but that's because that's what I've been doing for years. Their traffic isn't due to great content, it's based on the inertia of people like me. What a great business model! However, the new users (college kids for instance) will gravitate towards the best of breed applications, and the long-term (over the next 10-20 years) fate of Yahoo is to continue to lose users to better applications. For instance, I used to subscribe to Yahoo Music, but now I've switched over to Rhapsody and I've canceled my Yahoo Music.

Unless Yahoo comes up with a compelling application that REALLY differentiates them from the field, they will be destined to lose users in the long run. Google prefers to develop the expertise in-house, while Yahoo prefers to outsource it (by licensing and acquiring content). I'm aware that they've recently purchsed Flickr and MySpace.com, but once again, they're spending money on existing traffic (and leveraging the much-ballyhooed network effect). But there's nothing keeping someone else from coming along with a better Flickr or MySpace (witness the fast decline of Friendster as an example).

Perhaps we should debate the relative merits of developing applications in-house versus acquiring and licensing existing applications. What's cheaper and more effective in the long run? I don't know for sure, but I lean more towards the in-house philosophy.

Which is why my personal bet is on Google over Yahoo (although I wouldn't buy either stock at these prices). They have a superior core product that pulls in a huge amount of traffic, and they can build commodity products around that (basically, just copy the most popular Yahoo features). Yahoo, by choosing to ignore their core product years ago (who really uses Yahoo for search any more?), set the stage for someone like Google to take over and steal their thunder.

[Edward Ho]

Patrick, just to clarify, Myspace.com was purchased by News Corp. for 580mil last July. Yahoo did not buy them.

[B]

Henry,
Glad to see you are blogging! I've enjoyed your commentary and insight. I have to say that my experience is that Yahoo doesn't really know what it wants to be when it grows up. My take is it is sufferng a little bit from lack of focus. Yahoo is jack of all trades and master of none. I use the site daily for mail and not alot more. It is my home page yet the first thing I do is click on the Google icon when I want to search. There is an extreme difference in paid search and general search results. My experience is their search algorithms are less than desirable. To your point, I suspect it's a little of both in their results.

I will say that Google and Yahoo have received tremendous revenue from small to medium sized advertisers that are being squeezed. Thus, I suspect new revenue is not necessarily net new. I see it in the pay per click bids and the usual advertisers who are no longer choking down higher and higher fees.

[cutback23]

I still think there is bigger risk in owning google because users are less likely to migrate away from mail than they are from search.
If you want to use another search you can just click on it. If you want to change your address you have to inform all of your contacts and transfer all of your old messages
So I think yahoo will continue to have a captive audience.
Otherwise I agree that they need to develop their focus better and they need to address their search function.

[Dimitar Vesselinov]

"So Overture is targeting 2007 to get its ad system up-to-par with Google! What have they been doing for the last 18 months!? Terry should send Kevin Sites into that Hot Zone and find out!"
http://gotads.blogspot.com/2006/01/yahoos-numbers-what-do-they-mean.html

[philip letts]

Yahoo needs to decide whether to compete with Google or AOL in the short term.

And they need to decide fast before Google or MySpace sneak up on them more.

My gut is that they should probably focus on being the best full content, full service portal on the web and stop trying to be too much like Google.

They should co-exist with Google and focus on differentiation. That way everyone will have to use Google and Yahoo.

[Patrick Chu]

Re: MySpace error

Yikes. Sorry about that. Yahoo acquired del.icio.us, not MySpace. My bad.

Thanks for the correction.

[P-]

'The key question is whether the revenue deceleration (from 51% in Q2 and 46% in Q3 to 39% in Q4) is:... '

Common buddy! Henry(if that is who you really are or if you just want to be Mr. B-, whatever floats your boat!) you of all people would know that all you need is an extraneous charge or 2 or a non-ex to throw that seemingly decline of revenues off key. It's got to be based on more than just that!!

P-

[Victor]

Yahoo is in deep deep trouble, and this is being used against google rather stupidly. Yahoo's decline indicates a secular shift of users and monetization away from Yahoo and toward Google. There are a number of reports showing that Yahoo has lost users to Google in the last year - and a significant number of users. Google has also increased its ability to monetize while Yahoo has declined. Google's is going to report stellar earnings, no doubt. The trouble for Google, in the short term, is that sentiment has turned sour on technology in general. So while Google will probably earning $9+ this year, and $12+ next year, the multiple assigned to it will be lower. Amazingly, not because Google's growth has tempered, but because it's growth is tempering growth of Yahoo!

[Doug W.]

I was very pleased to find your blog today. I read an article by Danielle DiMartino, a great writer for the Business Section of the Dallas Morning News.
If you would like to check out our references to your interview with Maggie Mahar in our research paper on short selling,Riders on the Storm, you can find it at www.bestmindsinc.com. You are mentioned on pages 15-18. It really is not all that bad, for what you went through!
If you want a hard copy, drop me an email at the address listed above. The paper is app. 140 pages in length and contains interviews with some of the most famous short sellers today.

All the Best,

Doug