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Yahoo!: Turning Peanut Butter into More than Peanuts
[December 12, 2006]

Yahoo!: Turning Peanut Butter into More than Peanuts

President and Editor-in-Chief
 
(The following is taken from Rich Tehrani’s VoIP blog:)

If you haven’t heard, Yahoo! is restructuring. There is something called a peanut butter manifesto that has been circulating for months saying the company is spread too thin. As you may recall, recently Yahoo! was a big proponent of producing and distributing video content. In fact Media chief Lloyd Braun was hired to launch video content as part of Yahoo! services. This turned out to be a futile effort as evidenced by the fact that both COO Dan Rosenweig and Braun are now leaving the company.

The question worth asking what does this restructuring do for Yahoo!? The company has proven it is a defacto site for so many people who are looking for just about anything from weather to e-mail to stock quotes. It has become synonymous with the Internet. Is having more eyeballs than any other company now a bad thing? After all, many people use Yahoo! News, Yahoo! Mail, etc. Would less traffic be better?

The problem for Yahoo! is generating faster revenue growth. Based on Google’s (News - Alert) success, search is being monetized much more effectively than virtually anything else on the Net. Obviously Google is in the driver seat when it comes to search.

Yahoo! and MSN continue to improve their search engines but it seems no one cares as Google continues to gain on both companies. Yahoo! will have to develop the best search engine - or at least a much better engine - to compete effectively in this most lucrative area of the ad market.

If they fail to do this they are still positioned well as they get more traffic than any other site. The site is viral and sticky. It is however pretty well accepted that Yahoo! needs to do better in the social networking space where MySpace and YouTube play.

But Yahoo! is still strong in this area as their financial forums and other community sites have a tremendous amount of user input. For example the company owns Flickr and del.icio.us. In the end the problem for Yahoo! is the current advertiser obsession with search-based advertising.

As long as this obsession continues, Yahoo! with an inferior search product is in trouble. The other problem is branding. Google is synonymous with search. Yahoo! is not. Yahoo! with the best search engine in the world could potentially have little impact on Google’s lead. This obviously contrasts with the statement above but Yahoo! really has to have the best search it can to compete going forward.

Of course this assumes Google’s search will stay as good and Google doesn’t lose focus. But with all the money coming in from search ads, I think Google knows better than to take their eye off the ball.

Another point worth making is the critical mass Google has reached with hundreds of thousands of advertisers online. As more searching is done via Google the ad network grows and there becomes less and less reason for advertisers to use alternate search-based services for advertising. Sure companies do use Yahoo! and MSN but by ignoring Google they lose out on much of the total searches taking place online.

In effect this monopoly position Google enjoys allows them to raise prices as their search terms are auctioned and prices go up as more advertisers jump onto the network. Google also determines how much their partners receive as a split in the advertising buy. As Google is in the driver seat most web publishers cannot negotiate their pricing and are happy to get whatever split Google gives them. In addition Google’s terms stipulate you cannot have a competitive ad serving service on your site.

So Yahoo! is perfectly positioned as a massive portal of portals but the market at the moment has decided search is more important than run of site advertising. Yahoo! needs to find a way to attract a larger advertising community and to do that the common wisdom is they need to get more people using their search service. The problem is currently, most Yahoo users leave Yahoo! to do their searches on Google.

If the free market works correctly in the world of e-commerce, then Google ads are more efficient than Yahoo! ads, which is why the former is growing so quickly. Yahoo! has to hope search ads become less important or their search traffic gains momentum or perhaps the best situation is where Google ads continue to become so expensive that advertisers look to Yahoo! as an alternative.

It is obvious Google is in the driver seat and if Yahoo! really wants to boost revenue they need to focus on social networking and search to boost revenue while not abandoning their video initiatives. It remains to be seen how the company will be able to leverage this restructuring into new revenue that's more than peanuts.

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Rich Tehrani is President and Group Editor in Chief at TMC. In addition he is the Chairman of the world’s best attended VoIP event, Internet Telephony Conference & Expo.


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