Internet Outsider

Google Q4: So Long, Charlie

Haven't listened to the conference call yet, but looks like another mind-blower.  Revenue decelerating, yes, but still growing so fast that Yahoo and Microsoft look parked.

More tomorrow a.m...

 

Microsoft's Long, Slow Slide Into Web Irrelevance

The only thing I disagree with in John Battelle's write-up on Microsoft's "Live Search" strategy and continued slog toward web oblivion is that "it's too early to pass 'final judgement' on the strategy."  (Battelle is actually quoting Gartner's David Smith here). 

I agree that the "Live" brand is confusing and that Microsoft has not clearly explained what it is trying to accomplish.  What I disagree with is the implicit idea that Microsoft KNOWS what it's trying to accomplish on the web (short of somehow miraculously vanquishing Google)--and that it has any reasonable chance of achieving it.

I argued a year ago that the web war was over and Microsoft lost.  This seems even clearer with every passing day.  The only question in my mind is whether Microsoft can build enough of a wall around its crown jewels--Office and Windows--to survive over the long haul. 

Click Fraud Steady at 14%--Click Forensics

Click-fraud consulting firm Click Forensics estimates that industry-wide click fraud in Q4 was 14.2%, which is at the high end of levels measured earlier in the year (the quarters ranged from 13.7%-14.2%).  The firm also estimates that click fraud on content networks--the "affiliates" that advertisers are always complaining about--was significantly higher, at 19.2%.  Most importantly, click fraud was highest on expensive key words (over $2/click), at 21%.

Overall, these figures suggest that click fraud remains an annoying but controlled problem, one that most advertisers view as simply a cost of doing business .  The higher fraud on the content networks and high-priced keywords suggests that Google and Yahoo will have to devote more resources and/or refunds to remedying the problem.  This should ultimately have a modest negative impact on profitability. 

Back By Popular Demand...The Google Earnings Sweepstakes!

You know the drill.  Please submit your estimates of:

1) Google's Q4 NET REVENUE (excluding affiliate payouts),

2) The price at which Google's stock will open the morning after the earnings announcement, and

3) BONUS: Your logic about both of the above.  The more detail the better.

Please submit your bets to the comments section of this post by the market-close on Wednesday, January 31st.  As usual, the winner will get his/her name (real or alias) in lights in a follow-up post--and will also presumably cash in on an overnight stock trade (although that part is up to you).  Note that the sweepstakes tests your ability to not only project fundamental performance, but to have a good enough handle on the market consensus that you can anticipate how the market will react to it.

For reference, below is the Street's printed revenue consensus, which is almost certainly low-balled.  If Google hits this number, the stock will almost certainly tank. So the questions are, how much does the market think Google will beat this number by, and how much will it really beat it by?  And what will happen to the stock in the morning?

I regret that we can't use EPS for this game, but the random ways that analysts choose to calculate Google's EPS make the number nearly meaningless.  We could use operating margin, but then we'd still be arguing about whether stock-comp should be included (it should), and so on.  And who has time for that...

So submit those revenue bets and let the sweepstakes begin!

Street consensus Google Q4 NET REVENUE estimate (per Yahoo Finance): $2.19 Billion, with a range of $2.05 to $2.31.

Yahoo Revenue Growth Slows to a Crawl

I haven't looked at the numbers in detail yet (or listened to the conference call), but the big picture is clear:

Yahoo has a commanding global position in the fastest-growing media market in the world...and its top-line growth has decelerated to 15% year-over-year.  More distressingly, U.S. growth slowed to 8%.

The Panama announcement arrived just in the nick of time.

Yahoo Advertiser on Panama and The Real Problem

  Received the following note from a Yahoo advertiser, responding to my earlier post on how everyone's praying for the success of Panama.  The advertiser has drastically cut spending on Yahoo (in favor of Google) and argues that Yahoo's problem is NOT Panama, but poor conversions and click fraud.  This problem, the advertiser says, is the direct result of Yahoo's refusal to allow advertisers to select which sites in the Yahoo Network their ads appear on.  The advertiser likes Panama, but won't increase spending on Yahoo until/unless the above problem is addressed.

The note is lightly edited.  The writer wished to remain anonymous (with regard to publication).  If Panama works as planned, the improved targeting will presumably help address the conversion problem, but offering an opt-out does seem like a basic solution.

I thought your recent post regarding the Yahoo Switchover to Panama left out one crucial point.   

I am a long time advertiser on both of their Pay Per Click programs (PPC).  As a moderate sized advertiser, I actually find the new Yahoo Panama program easier to navigate and easier to get placement in exactly the location I choose.  Up until 18 months ago I spent about 60% of my on-line ad dollars with Yahoo and about 40% with Google.  Now I spend about 5% of my ad dollars with Yahoo and most of the balance with Google (small percentages go to MSN and ASK).  Based on the dramatic declines in Yahoo’s posted quarterly ad revenues [relative to Google], I posit that many other advertisers are also doing the same kind of switch. 

The simple reason is not the auctioning system and targeting algorithm.  Advertisers really care mostly about  Click Through Rate (CTR). And if they have no confidence in the accuracy of the CTR then they will not continue to spend their money.

The real reason Yahoo is failing and will continue to fail is because it has allowed its PPC program to be hi-jacked by fraudulent affiliates (and fraudulent clicks) to the point that an advertiser can no longer have any faith in the accuracy of its CTR.  An advertiser who spends any time with their web hit logs can clearly see this.  And the real test of their faith in the accuracy of their CTR statistics is to just look at how and where they spend their ad dollars. 

Advertisers are voting with their pocketbooks and the sound of pocketbooks snapping shut at Yahoo should be deafening.  And I am sure that it has been, except the decision makers at Yahoo either cannot or will not make the necessary changes to stop the free fall or they just simply do not understand the reason.

Somehow they think that their new ad targeting model (“Panama”) will solve the problem.  They may even believe this--at least they tell everyone this will be their solution.  Reliance on this solution is simply an invitation to be part of a “dead company walking”.  Yahoo will tell you that their new sophisticated system will stop fraudulent clicks from affiliates.  Advertisers certainly do not believe this. 

If Yahoo wants to reverse their slide, they only have to make one very easy-to-implement change.  (I want them to stay in the PPC game as viable competition to Google).  All they have to do is simply let their advertisers choose where they want their ads to be served. 

“Free to Choose” should be their new advertising mantra.  As does Google, let Yahoo advertisers choose NOT to have their ads served up on the Yahoo affiliates.  This change would open up my pocketbook at Yahoo again and I am certain it would do the same with many other previous Yahoo advertisers.  For those advertisers who have faith in the Yahoo affiliates, they can choose to have their ads served up on those sites.  If Yahoo fails to correct their current unwillingness to offer a choice of where ads are served in their Panama version, then I would urge all to buy “puts” on Yahoo stock.

Will Panama Switchover Dent Yahoo Revenue? And Boost Google's?

Yahoo shareholders, employees, and advertisers are, for obvious reasons, praying that Panama works.  For shareholders, occasional positive comments from customers are nice, but salvation will only come if and when Panama suddenly turbocharges revenue growth.  From the shareholders' perspective, if the system fails to do this,  it will have failed.

Given that the company began to transition customers to Panama in mid-Q4, any revenue acceleration will likely come in Q1 at the earliest.  A nearer-term question is whether the Panama transition will have a negative impact on Q4 (or even Q1) revenue--and whether Google will scoop up the difference. 

In today's WSJ ($), Kevin Delaney suggests that some small Yahoo customers have had to cut back spending significantly during the transition.  The comments are anecdotal, but the idea that the switchover might cause a temporary hit to revenue makes sense.  In one case, moreover, the spending that Yahoo lost went to Google instead:

Imagers, a family-owned Atlanta digital-printing business with a staff of 35 last year spent about $10,000 a month on search-related advertising through Yahoo. After its account was converted to Yahoo's new system around the start of this month, Imagers says Yahoo declined to let the company continue running some ads linked to specific keywords....Imagers says Yahoo customer service wasn't able to rectify the problem immediately, so it slashed spending on Yahoo to about a $700 monthly rate and increased its budget for ads on rival Google Inc.

According to Kevin, it took Yahoo three weeks to fix the problem, and Imagers has now increased its spending back to only 70% of the original level.  If Kevin's anecdotes are reflective of Yahoo's broader customer base, shareholders squinting to see light at the end of the tunnel may have to wait for another quarter or two.

What Yahoo Should Have Said to Wired

Several readers and Battelle have noted Fred Vogelstein's Wired story on how Yahoo! fumbled the search ball, as well as Yahoo's lengthy response.  Battelle suggests that this story will mark the bottom.  As a shareholder, I certainly hope so.

I still believe that it's time for Terry to step aside, if only to propel the company past the paralysis that comes with having open senior management positions (2), an impending CEO-succession power struggle between Sue Decker and whoever the company brings in to run the other major operating group, and thousands of employees justifiably worried about who their bosses will be and what the future will hold.  And then, of course, it's time for Panama to not only start allegedly impressing customers but accelerating revenue growth.  If both of those things happen, Fred's Wired story will, in fact, mark the bottom--and Yahoo!'s stock will significantly outperform Google's for the next two years.  If not, get ready for more of the same.

Yahoo's response to the story, predictably, describes how much benefit the company has derived from the Overture acquisition, how hard it has been for the company to develop Panama on the fly, and how strong the company's position is in graphical advertising.  What was left unsaid, however, and what demolishes the company's credibility every time it tries to defend itself, is the following:

Five years ago, despite troubles in the Internet advertising market, we were the dominant global Internet leader, and Google was a little-known pipsqueak.  Despite our brand, reach, and market share, however, we failed to recognize the awesome power of the new search business.  Whether this failure was the result of an obsession with more traditional forms of media, the distraction of trying to survive the first dotcom bust, or just poor execution is a topic for historians.  Regardless, our failure opened the door for a major new competitor, and in five short years, we have gone from runaway No. 1 in our business to a distant No. 2.  In the process, we have cost you, our shareholders, at least $100 billion.

Yes, I realize that no company would ever say anything like this (and that Yahoo has accomplished a lot).  But I would welcome a bit more acknowledgement of "Yes, we blew that round--and hats off to the folks at Google, who cleaned our clocks."

Grass-Roots Yahoo Shareholder Wants to Boot Terry

A small Yahoo shareholder, Eric Jackson, is trying to organize a grassroots web campaign to complete the baby-step shakeup Yahoo announced last month.  The idea of organizing shareholders via the web  is an excellent one (albeit quite challenging), and Jackson has already made some progress.  The Street's Vishesh Kumar has a good piece about the effort.

Chief among Jackson's Yahoo proposals is to immediately promote Sue Decker to CEO.  I agree wholeheartedly with this, because I think otherwise the company will be in suspended animation until the new CFO and Group Head are in place and Terry's successor is clear (a process that could take at least a year).  This isn't an anti-Terry position; it's just a pro-Yahoo one.  Until the shakeup has been completed and the company's management structure is clear, every valuable employee will have only one eye on the business.  The other will be on the "send" button, ready to send out their resumes.

Shameless Book Promo

Apologies for going off topic again, but the Goldman bonus discussion seemed to strike a chord, so perhaps this one will, too.  Also, many of you have asked about the book I was writing last summer, and there's finally news on that front.

The book is called The Wall Street Self-Defense Manual, and I believe it is finally available on Amazon and elsewhere.  I've published some excerpts on the book's web site, and Slate ran a couple of additional excerpts last week (here and here).  My publisher has also kindly allowed me to provide a downloadable PDF preview of the Table of Contents, Introduction, and Chapters 1 through 3.  To download this Preview, please click the link at the bottom of this post.

The first Slate excerpt shows why the average mutual fund will cost you approximately half of your potential retirement nest egg over 50 years.  The second excerpt argues that most ordinary investors should not buy hedge funds, a position that earned a predictable blast from some hedge-fund industry boosters.  As a result, I am now engaged in an online debate with fund-of-funds manager Ed Easterling on www.HedgeWorld.com .

The premise of the book is that the biggest risk to most investors' returns is not market crashes but the lack of a big-picture framework with which to make intelligent investment decisions.  Put differently, most investors know a lot more about how to intelligently buy a car than they do about how to intelligently select a mutual fund or construct a portfolio.  Because investors don't know these things, they are likely to follow bad. inappropriate, or irrelevant advice, buy inferior investment products, and/or fall prey to the biggest investment risk of all--their own emotions.  The goal of the book is to dispel some of the myths that permeate 90% of what one hears about investing, arm one with the knowledge necessary to avoid expensive mistakes (some of which are so common and accepted that they aren't recognized as mistakes), and, thus, help one invest more intelligently.

One warning: The book doesn't offer any secret tips on how to pick stocks.  Rather, it argues that most small investors should never pick stocks (or, for that matter, actively managed funds), and explains why not.  The mere suggestion of this often sends some people into apoplexy, so perhaps we will get some good counterarguments here.  In any case, if you have the time and inclination to read the book, I thank you in advance, and I hope you enjoy it.

Thanks again for the patience w/r/t the slow posting over the last few weeks.  I'll now try to get cracking again.

Download wall_street_self_defense_manual_preview.pdf