Yahoo: Ballyhoo! or Boo-Hoo?
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The demise of Yahoo! (NASDAQ: YHOO) may be premature at this point but the challenges the company faces are pretty sincere. The market at this point is valuing the core business at a number approaching zero as the company’s Asian assets, 40% of Alibaba Group and 35% of Yahoo! Japan, are worth close to the parent company’s current market cap.
The key for Yahoo! going forward will be to get themselves the working capital they need to rebuild their business in a market where their core product, premium banner advertisement, is losing out to paid search and other forms of advertising that is more targeted, like that dominated by Google (NASDAQ: GOOG) and whose infrastructure is unparalleled. Their partnership with Microsoft (NASDAQ: MSFT) to use Bing as their search engine has not improved their situation as Yahoo! Japan chose Google as their new search engine, locking up the most saturated internet market in the world with greater than 80% of the population connected and having locked up more than 85% of the search business.
Give Me the Cash!
With a surprisingly good 1Q 2012 earnings report, new CEO Scott Thompson announced he was streamlining the company, ditching products that were not adding anything to the company’s core business. As a means to protect the company’s cash flow this is probably the right thing to do, because Yahoo! is going to need cash to re-imagine itself with its core business fading.
To this end there are two major paths for them to produce significant sums of cash in the short term
- Sell their stakes in Alibaba and Yahoo! Japan
- Settle their patent infringement lawsuits with Facebook (NYSE:FB) for either cash or stock
The Yahoo! Japan assets are easily dealt with if the two sides can overcome a significant ‘valuation gap’ as Thompson termed it when negotiations broke down in late April. The Alibaba asset is more complicated. While Yahoo! is under pressure from stockholders to get these assets sold, the management obviously is not going to fire sale them either.
IP issues in the internet space make headlines and generate a ton of chatter but these issues are part of the landscape created by the legal structure of the U.S. whose Anti-Trust laws helped put Yahoo! in this position after nixing a merger with Google. In my mind, if shareholders are unhappy about their investments they should turn their ire towards the Department of Justice.
The legal battle that Yahoo! is waging against Facebook is a strategic one. If successful it will either shut up shareholders in the short run as Facebook settles for a huge sum of cash and/or stock or Yahoo! shores up one of its key revenue streams from further erosion by Facebook. Either way, the company improves its medium term financial position to invest in the technology it needs to compete with Google and Facebook.
The Search for Users
Yahoo!’s biggest problem at this point is the regular bleeding of users from its portal which is its core source of revenue. The latest search engine statistics show a disturbing trend for them. Since their integration with Microsoft using Bing as their search engine, Yahoo! has been losing market share to none other than Bing itself. I compiled data from NetMarketShare on search engine market share and broke it down by month since Yahoo! deployed Bing as their search engine, November 2010. In that time combined Google has lost around 2% of the total market share. Bing has gained 3%, from 9.66% to 12.65% and Yahoo! has lost 1% from 11.44% to 10.41%
So far, their partnership has been to Microsoft’s advantage clearly, with Bing grabbing market share in 2012, likely due to backlash over Google’s new privacy policy while Yahoo! has lost market share if anything.
Their presence in China is non-existent as Baidu (NASDAQ: BIDU) owns more than 70% of the market share there, and while Baidu has its own problems growing beyond the search space, they have the luxury of being the 800 pound gorilla in a potential market that is unparalleled in size with the exception of India. Baidu is going for the kill shot over in China, using Google’s own Android to build a version, call Baidu Yi, to try and become the dominant platform in the mobile market. Vietnam, another huge potential market is tied up even tighter with Google than the U.S. at 91+% usage statistics, especially with the shutdown of Yahoo 360 in 2009.
The situation gets even worse when you drill into the numbers by browser. Microsoft’s Internet Explorer has lost significant market share to Google Chrome. Chrome has taken 4% from IE and 2% from Firefox globally in the past 12 months to up its market share to 19%. 93% of Chrome users use Google as their search engine. The numbers are more egalitarian under IE with Bing taking 20%, Yahoo 13% and Google just 62%. These trends are just not in Yahoo!’s favor.
And I’m sure everyone at the company knows this.
The Platform’s The Thing
The biggest problem facing Yahoo is the fact that as a portal it is outdated when you compare it to Facebook. Their attempts as building communities of users still feels like the web did when I was a teenager. Their products are a glimpse into the internet that was not the internet that is or will be. One look at MSN.com should give you the same feeling. At times, yes, having the content of the day pushed at you is valuable, but with the majority of new internet users starting out with a mobile device, the real estate just isn’t there to push the same amount of content that it was possible to do before and still find room for the advertisement.
For many of us our Twitter feeds have become our news and entertainment streams. It is how we get the information we want when we are interested in it.
The way we interact with the web is changing. Instead of opening up your browser and letting your home page take you around the world, the world now comes to you from those you know and love. That’s the crucial difference between Facebook and Yahoo/MSN/AOL etc. Facebook can and does bring the content to you displaying it on their platform. Facebook users spend five to six times more time on Facebook than they do on other platforms, preferring to stay there and share ideas and updates there.
On Facebook you and your friends drive the content. On Yahoo the content drives you.
The advertising money allocations are changing because of this shift in usage; moving towards bidding networks as advertisers continue to move away from contextual advertising and towards speaking to the user based on his behavior. This is why if you spent $5 on a computer game recently or clicked on a banner ad for something that product seems to follow you around the internet, and you’re thinking to yourself, “When did [insert niche product here] get so much money to be everywhere on the web?!” They didn’t. You are the target and they are just following you around. It reminds me of the advertising blimp from the classic film Blade Runner except that blimp is speaking only to you.
And until Yahoo!’s management figures out how to move away from being a traditional server of ads to a shrinking portion of the internet, they will continue to fade out of the public eye.
Peter Pham has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Google, Microsoft, and Yahoo!. Motley Fool newsletter services recommend Baidu, Google, Microsoft, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
