A couple weeks ago, Marissa Mayer surprised a lot of people in the industry when the company she runs now, Yahoo, announced plans to outsource some of its ad sales to the company that made her famous and she quit in July, Google.
In a note on its corporate blog, Yahoo said it had signed “a global, non-exclusive agreement with Google to display ads on various Yahoo! properties and certain co-branded sites using Google’s AdSense for Content and Google’s AdMob services.”
The news was surprising for a couple reasons.
- When Mayer quit Google in July for the job at Yahoo, she didn’t do it in the friendliest way.
Check out this chart from Goldman Sachs (which we hear is working with Yahoo on strategy):
Another reason why Yahoo needs mobile help is that it depends on traffic to its Webpages from home PCs, and those are being replaced by tablets.
The new app features a simpler sign-up process, 16 camera filters and full groups capabilities, which used to only be available on Flickr.com.
Earlier this week, Instagram pulled the plug on Twitter, making it no longer possible to view Instagram photos in your Twitter stream.
Yahoo has acquired a startup called OnTheAir.
OnTheAir launched in March of this year.
It’s been described in the past as a “Skype Meets Google+ Hangouts.”
A Mashable review of the product says this is how it works:
“Say you want to host a channel about blogging, you can schedule live conversations at any time and moderate who speaks. If you connect the tool to Facebook and Twitter, the site automatically shares the time of the chat to Facebook friends and Twitter followers.”
Investors include Scott Banister, Will Smith, True Ventures, and Triple Point Ventures.
Yahoo CEO Marissa Mayer has said that one way she intends to restock the company with talented engineers is through small acquisitions. These transactions are often called aqui-hires.
They are a nice way for a failed company to end.
Here’s the blog post from OnTheAir, announcing the news:
We are excited to share some big news: OnTheAir has been acquired by Yahoo!.
When we started OnTheAir, we had dreams of building a company that made a difference in the daily lives of millions. Our pursuit was challenging: We put in late nights together. We debated intensely. We worked like crazy to build a product we were proud to put our name on.
Despite the challenges, our experience has been a rewarding one. We got to launch multiple products to a wonderful community. We were coached and mentored by some of the brighte! st inves tors and advisors in Technology (see our list below and work with them if you ever get the chance!). Most importantly, we developed deep bonds as a team and learned how to work together as a unit.
While we haven’t yet attained our dream of building a widespread daily use product, we are just as committed to it. And this is why we’re so excited to be joining Yahoo!. When we first met with the team at Yahoo!, it was clear that everybody there is committed to making mobile products the backbone for the world’s daily habits. All in all, it’s a fascinating time to be joining Yahoo!. There’s a tremendous amount of energy in the company. There are big things to be done and great products to be built, and we’re thrilled to be a part of it.
We want to conclude this letter with a word of gratitude. Thank you to all of our customers, team members, mentors, advisors, investors, consultants, friends, and family for being a special part of OnTheAir. Building a company is no easy task, and we realize we wouldn’t be anywhere without your support.
The OnTheAir Team
Abel, Dan, Erik, Josh, and Mike
Stifel analyst Jordan Rohan put out a note this morning reducing estimates for Yahoo’s financials in the third quarter “and beyond.”
The main reason?
Yahoo’s search share is tanking at an alarming rate.
That’s a problem because search is a pure profit center for Yahoo. Rohan decreased his Q3 revenue projection for Yahoo $80 million and his EBITDA projection $70 million.
Here’s a chart based on ComScore data of Yahoo’s core search “growth”:
Yahoo outsources search tech and search monetization, and Yahoo.com isn’t growing much at all.
You might think that this kind of atrophy is normal for a company in that position. You’d be wrong.
And look at Ask, which also uses Google:
The silver lining for Yahoo, YHOO owners, and Mayer is this: Looking at AOL and Ask reveals search growth can turn around.
It might help for Yahoo to switch to Google. The DoJ barred Yahoo from doing that back in 2009, but it’s obviously a different era ! now.
Pound the alarm!
In September, Yahoo’s search business shrank 25 percent from last year’s number.
That’s according to ComScore numbers analyzed by Ben Schachter of Macquarie Securities.
Yahoo’s share of search queries dropped from 15.5% in September 2011 to 12.2 percent last month. In August, its share stood at 12.2 percent.
“[T]he downward trend remains very well-established and supports our view that the long-term trajectory of YHOO’s search share is a significant concern,” Schachter wrote. “Most importantly, and unfortunately for YHOO, we see no obvious structural bottom for YHOO’s search share. This is a significant problem in our view given the fact that search is a very high-margin business for YHOO and likely represents the significant majority of the company’s EBITDA.”
The ComScore numbers don’t include mobile, which is an area where Yahoo is likely even weaker than on desktop searches.
The Argument Against CEO Marissa Mayer’s Alleged Plot To Go After Google And Facebook (GOOG, YHOO, FB)
Yahoo’s board hired Marissa Mayer to be its CEO because board members want the company to embrace a “products” strategy instead of the “media” strategy that interim CEO Ross Levinsohn would have gone with if he had gotten the full time job.
What kind of software tools?
Google products include Google News, Gmail, Google Maps, and Google Docs. Facebook products include Events, Photos, and News Feed. Yahoo’s top products are email, Yahoo Finance, and Yahoo fantasy sports.
It’s obvious why this strategy is appealing to Yahoo’s board. All you have to do is look at the size of Google, a $200 billlion company, and Facebook, a $65 billion company.
One reason they are so big (other than lots of growth) is because they have wonderful margins typical of the Internet software business, where raw materials and freight are cheap. Also, you can build Gmail once and then move most of the engineers who built it onto something else, leaving only a few behind to maintain and upgrade it.
Margins aren’t as lovely in the media business. If your business is to create content, you have a recurring cost the software business does not have; you have to pay people to create it over and over. If you depend on these people too much, they ask for too much money. Likewise, if your business is in the distribution of content, the people who make it will do their best to figure out, and then cut into your margins. (This is why Hulu and Spotify are longshot bets to take over the world.)
So, focusing on a “products” strategy seems like a smart, no-brainer, right?
Not so fast, says one long-time Yahoo-watcher we recently spoke to.
This person says that the conventional wisdom about the software business’s excellent margins, outlined above, is outdated and that Google is to blame.
He told us:
“12 years ago, engineering and helpful tools were such an incredible change in lifestyle so that if you were good at it, you could make a lot of moeny. Software was a crazy high margin business. But here’s what’s changed: Google and companies worth $100 billion and $200 billion have brought software innovation to a zero margin business. They don’t charge for software. They don’t charge for ad serving. They don’t charge for reporting. Google makes all their money on a monopolistic position in advertising. There are no software businesses anymore. The software business is dead. The people who are making their money there are doing it because Google hasn’t killed them yet.”
Translation: Google can afford to make software tools for consumers free to use because it’s search business makes so much money, so Yahoo would be nuts to go out and try making a Yahoo Docs, Yahoo Maps, or Yahoo mobile operating system.
Hopefully, that’s not Mayer’s plan for Yahoo.
Hopefully, the plan is to bring “product” features to Yahoo’s powerful media brands, Yahoo Sports, Yahoo News, and Yahoo Finance.
Here’s A Terrifying Chart For Those Hoping For Lots More Growth In Online Advertising (GOOG, YHOO, AOL, FB, LNKD)
Finally: We can put to rest a long time industry excuse.
It used to be that big time executives at companies like Yahoo, AOL, and Facebook could explain away ad revenues that weren’t big enough or growing fast enough by pointing out that so far, online ad spending has not been proportional to the amount of time consumers were spending online, and that this was bound to change, and when it did, boom times were ahead.
The argument was: New York ad buyers are way behind the times, and they just don’t get it yet.
Well, don’t look now, but according to this chart Mary Meeker’s latest presentation on the state of the Web, Internet ad spending, 22% of total ad spend, has just about caught up with time spent online, 26%. That ratio is fairly comparable to old mediums like TV (43/42) and Radio (15/11). Just the last time Meeker gave this presentation, the ratio was 16/22.
Attention Facebook, Yahoo, and AOL execs: Your excuse has expired. Ad buyers are spending a commensurate amount of money on your medium as any other. Now your products have to perform better.
It is now the second largest search engine in the U.S., just edging past Yahoo for the first time in December, according to the latest comScore data. That’s nice and all, but Microsoft is in a partnership with Yahoo, so it probably doesn’t want to be taking share from Yahoo.
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Dr. Augustine Fou is Digital Consigliere to marketing executives, advising them on digital strategy and Unified Marketing(tm). Dr Fou has over 17 years of in-the-trenches, hands-on experience, which enables him to provide objective, in-depth assessments of their current marketing programs and recommendations for improving business impact and ROI using digital insights.
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