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Yahoo! (YHOO)Stock (Internet Advertising Industry, Internet Industry, Internet Advertisers Industry, Media & Entertainment Industry)
 Nearly ninety percent of Yahoo!'s revenues come from the online advertising business. Google and Yahoo! are the recognized leaders in this market, but the balance of power has shifted significantly since 2004, when the companies posted similar same revenue and operating margin rates. Google has since eclipsed its main rival - in 2006, it generated 65% more revenue ($10.6 billion) than Yahoo! ($6.4 billion) with an operating margin over twice as high (33% versus 15%). In 2008, Yahoo! faced a crucial crossroads in its history. News of software giant Microsoft's unsolicited $46 billion bid to buy the company saturated finance and technology websites and cast a cloud of doubt over Yahoo!'s future. A merger between Yahoo! and Microsoft would have created a company with the potential to challenge market leader Google for a share of the exploding revenues in online advertising sales, as well as cut into Google's dominance of search. Using 2007 data, a combined Yahoo-Microsoft would have had 32% of the ad revenue market versus 44% for Google, and 32.7% of internet search versus Google's 58.4% market share.[1] Ultimately, Microsoft walked away from the deal after Yahoo! refused its second offer of $33 per share, a $5 billion increase from their initial offer. Later developments on the acquisition front came from billion investor Carl Icahn, who started a proxy battle for Yahoo! after the second Microsoft offer fell through. In July 2008, Icahn was appointed to Yahoo's board of directors, along with two of his "allies"[2]
[edit] Overview[edit] How Yahoo! Makes MoneyFounded as a web directory by two Stanford graduates in 1994, Yahoo! has since become a dominant player in the field of Internet services. Despite a 31% revenue drop in 2001 during the burst of dot-com bubble, Yahoo! has experienced 46% annual growth in the years since, culminating in $6.4 billion in 2006 revenue. 
Source: Company data Yahoo! revenues continued to increase in 2007, with 3rd quarter earnings rising 12% from 2006 and 4th quarter revenues up 8%, but operating income dropped 26% in Q307 and 21% in Q407 relative to the same periods in the previous year. There were several causes for this disconcerting drop, including renegotiated deals with affiliates, restructuring costs as the company invested heavily in its platform design and marketing divisions, and cutbacks on non-core businesses. The company also lowered its expectations for 2008, stating that many of the issues that cut into revenues in the second half of 2007 remain unresolved.[4] The firm plans to lay off as many as 1,000 workers while restructuring to focus mainly on its core businesses, and it also announced a re-negotiated deal with AT&T regarding their co-branded Internet access package in which the companies will no longer share per subscriber revenue fees as they had in the past. [edit] OfferingsYahoo!'s offerings can be divided into two categories, product-based and content-based. In addition to these basic offerings, Yahoo! has expanded into mobile advertising, content, and services.
Yahoo! has also recently reorganized its company structure around three areas of focus: Audience (general web traffic), Advertisers and Publishers (those paying to advertise through Yahoo!), and Technology (new platform/product development).
[edit] Trends and Forces[edit] Increase in Online AdvertisingAs can be seen in the table below, a snapshot of U.S. advertising spending shows a disproportionate skew in favor of newspaper, TV and direct mail. However, the Internet channel has grown 18% per year since 2001--faster than any other channel--taking share from stagnant channels such as newspaper, which has been flat over the same time period.  At its current growth trajectory, worldwide Internet use is expected to nearly double by 2010, hitting 1.8 billion distinct users. Continued growth in quality and availability of Internet access means that the Internet services sector--particularly Internet advertising--will remain lucrative for some time to come. An increasingly pronounced trend of replacing print directories and classifieds with virtual alternatives will also create a push for online search use as well as increase demand for online classifieds. 
[edit] Online Video Advertising GrowthVideo advertising promises to be a particularly lucrative area of rapid growth in the online advertising sector, expected to grow by more than one third of its current size in one year. Yahoo! stands to gain from any increase in video advertising, with its dominant Yahoo! Videos offering and its expertise in "rich media" advertising. However, Google's YouTube and MySpace are catching up quickly. [edit] Branded vs. Search AdvertisingBranded advertising is often image-based and usually priced on an "impressions" basis--the more times it shows up, the more the advertiser pay. Search advertisements are primarily text-based and usually rely on click-through; the more times a particular link is clicked, the more Yahoo is paid. Together, the two constitute a good balance of different kinds of online advertising. However, branded advertising tends to depend very heavily on the economic situation of the brands in question--so if the United States experiences an economic slowdown, for instance, Yahoo's branded advertising would suffer significantly. [edit] Mobile AdvertisingMobile content is in its nascent stages and is currently growing at more than 20% per year, making it a powerful source of potential growth for Yahoo!. On its end, the company has been actively pursuing partnerships with carriers and original equipment manufacturers in the mobile industry--including leading manufacturer Nokia (NOK)--and is now beginning a push to fully monetize its strong mobile user base. [edit] Competition ConvergenceOnce-distinct Internet companies are suddenly all stepping on each others' toes, each in an effort to tap into anther lucrative market to expand its own fortunes. This increasing amount of overlap between providers means that Internet service companies must deal with rising competition. To do so, they must lower the prices that advertisers must pay to use their advertising platforms--and in doing so, raise their traffic acquisition costs (TACs), which will eat into their profit margins. Rising TACs are a problem for all ad-based Internet-service companies, but especially so for Yahoo!, with its widely varied holdings in many different content and product markets. [edit] Expanding International MarketsStrong expansion in Internet connectivity and activity in Asia and Europe means that Internet service companies will have to consider much more than just the domestic advertising scene. Yahoo! is well-positioned for a rise in Asian traffic and advertising. Asian companies exhibit a tendency to stick with familiar, well-known, tried-and-true options, both for search and for advertising. Yahoo!'s well-established name and solid partnerships in Asia make international expansion a promising opportunity for the company. China's Internet demand has risen dramatically and now has the second largest number of Internet users in the world. But in Europe, Yahoo! may face more challenges, losing significant search share here to Google and Microsoft. Yahoo owns a 40% stake in Alibaba, a Chinese internet company which plans to IPO. [edit] Declining Relations with Telecommunication CompaniesYahoo!'s partnerships with companies like AT&T (T) to provide "premium" email and other services are being shaken by the recent trend among other Internet service providers of reducing or eliminating fees for premium features. As a result, Yahoo!'s premium email is no longer worth so much to the telecommunication companies' consumers. AT&T announced in March 2007 that it would be looking to renegotiate its contract with Yahoo!, a move which will likely result in a loss of revenue for Yahoo!. About 15% of Yahoo!'s total revenues currently come from premium fees, and of this fee-based revenue, 40% comes by way of telecommunications partnerships (about $300-400 million). [edit] CompetitionGoogle (GOOG) is commonly acknowledged to be Yahoo!'s biggest competitor. Its recent acquisition of popular video site YouTube and partnership with MySpace pit it directly against Yahoo! in media streaming, and the two already have a long-standing rivalry over search-based online advertising. Yahoo! has lost significant search market share to Google. In January of this year, Google made headlines by overtaking Yahoo in unique users per month.  However, Yahoo! recently released a next-generation online advertising platform system called Panama. Their system will in theory optimize advertising profits by increasing the average revenue per search click and has returned modestly successful results so far. Yahoo!'s recent acquisitions of RightMedia and BlueLithium [1] further solidifies its position in display advertising. Finally, Yahoo!'s perceived role as a community-based entertainment site may also give it a slight edge over Google in entertainment-based advertising. However, Google's MySpace-YouTube advertising alliance may be poised to challenge the company. With the introduction of Windows Live and adCenter, Microsoft is also a growing threat. Microsoft's acquisition of LiveJournal gives it a significant foothold in the webblog scene, and along with Google, it has been steadily gaining ground against Yahoo! in the European Internet services market. However, by itself Microsoft remains less a threat than Google. The table below tallies the numbers of searches made through Yahoo, Google, and Microsoft for select months, November 2005 - November 2006. It also shows the percent share attributed to each company of the total US search queries for that month.
 Yahoo!2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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