Yahoo Wilts. Prepare for Won't-Affect-Google Denials

Yahoo's Semel and Decker dropped the bomb this morning at a Goldman conference: Yahoo!'s Q3 is wilting.  Nothing serious yet--just revenue at the "low end of the range"--but still eerily similar to the early warnings from Yahoo 6 years ago, when Yahoo!'s Q3 started looking sluggish in mid-September and then weakened further by the day.  If memory serves, the company just made that quarter (Q3), but severely reduced guidance for Q4 and then bombed Q1.  And the rest of the economy wasn't far behind.

True, Yahoo's revenue is more diversified than in 2000, and there aren't a few hundred etailers about to start reneging on $30 million portal deals, but still: When the economy slows, advertising is one of the first expenses to go, and even the top dogs aren't immune.

Get ready, however.  In coming days, a parade of analysts will eloquently explain why the trends that are hobbling Yahoo! won't affect Google--Google's revenue is pay-per-click, Google is a "must buy" for advertisers, Google has a much stronger market position, etc.  Listen politely, but don't believe it. 

Google is now a $7 billion global business with one primary revenue stream: advertising.  Google may do better in a recession than, say, a television network, but that doesn't mean it will do well.  $7 billion is a significant chunk of not only online advertising but all advertising, and if all advertising slows (or, worse, shrinks), Google's revenue will, too.

Back in 2000, the theory was that, as the dotcom shakeout progressed, the dominant players would slow for a quarter or two but avoid most of the damage.  Yes, it's different now, in some ways, but one lesson from that period should be clear.  Even No.'s 1 and 2 drink from the same stream as everyone else.

Comments

[Andy]

Welcome back. I think the real question here is whether this is foreshadowing of cyclicality, or worse, pro-cyclicality. Either way, I think an economic downturn would be a long-term positive for both Yahoo and Google, as it would accelerate the demise of traditional media, which in some areas is already reeling.

[Yeah Henry]

Henry back, and no sign of that King Troll.

Second aint bad.

Yeah Henry.

[cutback23]

I think yahoo has many problems specific to yahoo. Any downturn will hurt them more than the others.
They seem to make changes where they don't need to(their message boards)and don't make changes where they need to (their video clips)

[Piyush Pant]

You seem to have jumped to the conclusion that the shortfall Yahoo has indicated is due to a general advertising slowdown. There is no other evidence of that and that is only one of the possibilities. Far more plausible, as far as I see it, is that Yahoo is generally stumbling badly and is being decimated by Google. I won't be surprised to see this being directly attributable to losing customers to google.
A previous comment has illustrated some examples of its recent troubles - add to that its recent inability to deliver its much touted new platform.
The fact is that Google has demonstrated flawless execution which yahoo can only dream of at this stage. There is no evidence that this is not going to continue.

[Victor]

Welcome back Henry!

Google continues to gain share in the US:
http://www.businessweek.com/ap/financialnews/D8K841SO0.htm

And yahoo's dilatory launch of Panema continues to hurt them. The more they disappoint, the more people will come to expect a miracle of Panema. There's a huge amount of pressure on Yahoo's management to start delivering again.

[Victor]

Although, I'm saddened to see you're still peddling your theories that CPC advertising will be hurt in the same way as traditional advertising in an economic slow-down, without acknowledging that cost of sales is treated in a fundamentally different way to cost of marketing. Businesses don't cut back on cost of sales because that implies cutting back on sales (which are measurable and which they can track)

[Still Inside]

In reading the details of the story (what a concept), I note the following:

"The reason for the lowered guidance is a slowdown in advertising spending in two key areas, autos and finance. "

and

"A key component of the finance advertising market is the mortgage and re-finance component."

This doesn't sound like a broken YHOO to me, it sounds like a broken market. We all know that the fi/re-fi market was gigantic in the past years, and we also all know that the party is over in real estate, which means that those guys are going to start turning down (not off, to Victor's point) the online ad faucet.

So yeah, this certainly can portend an overall market slowdown. Without corroborating evidence though, I'd say it's a little early to bet the farm on it.

Victor:

Online ads can be either a cost-of-sales thing OR a marketing expense depending on whether you are driving sales or sign-ups. Clearly, a big chunk of online marketing is of the loss leader variety and does not (and cannot, from a profitability standpoint) drive sales directly.

That said, there is falacy in your thinking here. If global demand for goods and services drops (in other words, if fewer people actually want them) then the CPC model works "perfectly" the other direction: it will perfectly track the dropping demand. In other words, there will be fewer clicks, which means less revenue for the people that sell clicks, as well as the people that buy them.

SI

[billy]

Victor,

Its a shame you continue to peddle the myth that google is immune to the laws every other company in history has faced.

Ok google is greatest company ever. No chance of it ever being bothered by something as miniscule as a weak economy.

[Victor]

SI, you make a good point at the macro level; if demand does wane enough that will affect the number of clicks. However I think it's pretty clear that we are still along way off full saturation of the internet as a medium for buying and selling goods, so I don't think the macro-level factors are important yet. The more important factor, I think, is that in a down-turn businesses will focus more on measurable returns and less on brand marketing.

Anyway, this is not an argument to convince the bears, who seem to be permanently negative on GOOG regardless of its price. And one day the bears might be right and the stock will dip precipitously; but that isnt really surprising because even a stopped clock has the right time twice a day. Remain a bear forever and eventually something bad will happen.

[billy]

Victor,

The stopped clock anaolgy is very unfair. If i bought a stock at 20 a year ago but it dropped to 10 for 9 months of the year but ultimately finished the year at 40 i would not say i was wrong just because my investment was negative for the year.

In general when you bet against a stock in a mega up trend or buy one in a mega downtrend the trend take a long long time to reverse. So yeah most people who try to bottom pick stocks or top picks stocks are generally early. But to call them stopped clocks like the moron Cramer does is very unfair.

So yeah who knows where google stock is going to trade. But if the bears were ultinately right it would be unfair to call them stopped clocks.

[Christopher Laudani]

Good point, Henry. Google hasn't been able to diversify it's revenue mix. Inexperienced investors will get a nasty wake up call when GOOG's revenue stream slows.

[Vic]

I think a lot of this has to do with the Yahoo Finance message board fiasco. I'm sure once advertisers got wind of what was happening there, they pulled their spots. Also, we are currently experiencing a mini re-boom in refi's. Rates have come down a little from the highs so advertisers spending budgets may open up a bit more during this window. I guess time will tell, as it always does.

[billy]

what the yahoo message board fiasco?

[Victor]

http://www.nytimes.com/2006/09/20/technology/20place.html?ref=media

Read this Henry.

'James E. Riesenbach, the chief executive of AutoByTel, said his site had seen no changes in spending by auto manufacturers or dealers, despite the financial ills of Detroit.

“What I keep hearing is the auto manufacturers see the Internet as their most efficient sales channel, and they want to figure out how to spend more money online, not less,” Mr. Riesenbach said.'