Wednesday, July 19, 2006

Yah-ooch!: Yahoo Net Off 80 Percent, Keyword Ads and Product Spending Eyed

WSJ Online covers the disappointing earnings report posted by Yahoo, though the CNN Money story has more meaty analysis. While WSJ muses on potential seasonal factors, CNN Money dives in deeper into the real issues: a delayed launch of Yahoo's improved ad system to compete with Google's superior keyword service and questionable product investments. Yahoo has dumped a ton into its home page redesign and has invested heavily in a wide variety of online content products and services, many of which have yet to produce significant market advantages. It's perhaps a bit too early to get gloomy and doomy about the most popular Web site on the planet, but it's not beyond mentioning that Yahoo seems to be entering a new phase of product maturity - one which challenges them to come up with an effective growth formula. In short, Yahoo is becoming in some ways just another media company that's hard-pressed to hold down the production costs of content while struggling to turn its page inventory into ad sales.

In the meantime rival Google goes lean and mean with product design via its highly evolutionary and exploratory approach to development and relatively trivial investments in media deals and media production. Google's still-superior keyword ad network remains for the moment far more efficient at monetizing its page inventories in search results and other destinations, allowing Google to focus investments on well-scaled infrastructure tied closely to their core mission. Redesign the home page? Shucks, not much to do there. Google's investment profile is also improved by their implicit investments in R&D: with Google employees encouraged to spend a significant portion of their time just tinkering around with new ideas, Google is likely to be more on track with "100x" ideas to accelerate revenues.

Potential dangers lie ahead for Google as well, of course. It's total page views are well behind Yahoo, an indication that in spite of its dominant position in search it's still not very good in helping users to hang around and enjoy the scenery. But Google's points of inflection tend to be more mission-critical than Yahoo's: if you're on a Google page you have a pretty specific objective in mind, increasing the value of a context for advertisers. This also commends Google services to no-nonsense corporate environments more easily, where so many eyeballs wind up doing double duty for personal and business missions. With lots more traditional entertainment content and rather fluffy user-generated media (finance being a key exception), lots of people go to Yahoo but with perhaps a little less of a hard-core mission in mind.

Some of Yahoo's problems will work themselves out naturally in the next few months as improved ad services for search take hold and new services mature that draw away ever more users from AOL and other suffering portals. There's nothing wrong with being an enormously successful media company, but when your hopes for growth are hinging on creating more big and bad content than the other team it's a challenge to return as high margins in the long run as efforts that are glad to let other people create and own the inventory of content that's necessary to make a buck. Yahoo may yet be able to span both worlds successfully and to subsume at least part of Google's mission, but it may wind up staying a perennial number one in traffic and a number two in profits.

UPDATE: I wrote the above before news of Google's remarkably robust Q206 earnings, with a 77 percent growth in earnings and a doubling of earnings. So much for seasonal issues - when your revenues rely on the vast network of sites employing Google AdSense as well as your own page inventory to drive revenues. If Yahoo's ad network catches on later this year the top line may suffer a bit at Google, but it's likely that we'll continue to see the fundamental innovations at Google that add value to content regardless of its source to continue producing healthy margins for some time to come. IHT reminds us that Microsoft is taking a dive on earnings also as it fiddles with its Xbox video game console rollout and other costly product developments - even as they plan to buy back more stock. There are good opportunities for Google to make profitable inroads against both Yahoo and Google as they wrestle with less profitable approaches to content development.
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