Yahoo's ad challenges: Social, mobile, operational

Carol Bartz's successor at Yahoo will have to deal better with Yahoo's existing ad businesses and to expand more into hot new domains on the Net.

Yahoo, in the throes of a CEO transition after yesterday's ouster of Carol Bartz , has a central priority: fix advertising.

A company like Yahoo has two major constituencies, its audience and its advertisers. When it comes to making money, though, Yahoo has problems with both. People in the audience are spending more of their online lives on social networks and mobile devices, and the advertising market is shifting accordingly.

Compounding the problem is Yahoo's weak search-ad revenue, supplied through a Microsoft partnership after the rival took over Yahoo's search technology for its Bing site.

Online ad spending is growing--but Yahoo is having trouble tapping into that growth.
Online ad spending is growing, eMarketer statistics show--but Yahoo is having trouble tapping into that growth. eMarketer

Plenty of companies have problems with the present grim economic mood. But online advertising, overall, is growing: eMarketer forecasts 20 percent growth in the U.S. to $31.3 billion, rising to $49.5 billion in 2015. It's Yahoo that dropped the ball.

Yahoo's most recent quarter is a case in point. It had inventory to sell at premium rates--in other words, desirable Web pages for advertisers to place so-called "display" ads. But the company but couldn't sell them enough because it simply didn't have enough sales staff after a reorg led to staff departures. Display-ad growth was only 5 percent

And while Yahoo shucked a lot of expense when it handed over its search technology business to Microsoft, the partnership isn't performing well when it comes to Yahoo's revenue per search. Microsoft supplies the search technology, and the two companies split the resulting search-ad revenue, but Yahoo got more revenue per search when the technology was in-house.

"There is obviously an admitted problem in Yahoo's display [ad] business, but, in our view, the more important issue is that we think that it is only a matter of time before the ultra-high-margin search business begins to unravel," said Macquarie Securities analyst Ben Schachter in a research note. "Bartz's removal does not change that trajectory."

Related stories:
• Yahoo's Bartz out as chief executive
• With Bartz gone, Yahoo should be ready to deal
• Yahoo, Bartz part ways (roundup)

At the same time Yahoo is having operational issues, big rivals are getting ahead and new advertising domains are opening up. One of the big ones is social networking, which for many people has become the hub of their online lives. That pushes portal-style operations such as Yahoo to the periphery.

And the money follows the audience attention. Facebook will dethrone Yahoo this year as the top seller of display ads in the United States, eMarketer predicted. In 2009, Yahoo had 16 percent of the U.S. display-ad market to Facebook's 7 percent; this year, that should switch to 13 percent and 17 percent, respectively. The gap should widen further in 2012, eMarketer said, at which point Yahoo's share losses and Google's share gains should mean Google's display-ad business should nearly match Yahoo's.

Google is big and getting bigger in U.S. online advertising. Yahoo is big but getting smaller.
Google is big and getting bigger in U.S. online advertising. Yahoo is big but getting smaller. eMarketer

Google, meanwhile, has launched Google+, which shows signs of being more successful than its earlier social-network efforts even if it's not supplanting Facebook.

In terms of ad distribution, Google is tops, according to a of 270 million Net domains by Attributor to see what ad networks supply them. "Google and DoubleClick overwhelmingly dominate the market. Combined they account for more than 65 percent of the market share," Attributor said in May.

Google also has a major asset in the advertising market: YouTube. The site has had mixed success as a streaming-video site for traditional TV and movie content, but Google's years of work trying to turn YouTube into a revenue engine are gradually paying off. Yahoo is apparently interested in buying Hulu , which could give it some prime content for video ads.

Mobile also is a fast-growth area, surging past $1 billion in spending in the United States this year and headed toward $2.5 billion in 2014. Although some traditional display-ad technology serves this market, a lot of the action takes place within applications tailored for the devices--thus Google's acquisition of AdMob and Apple's acquisition of Quattro Wireless . Yahoo offers mobile-ad services, but it's not at the forefront.

"Yahoo had been a leader in mobile advertising and content, but under Bartz, the company slipped behind its chief rivals/partners (Google, Microsoft, Facebook)," eMarketer mobile analyst Noah Elkin told CNET. "Mobile seemed to get lost in the reshuffling of corporate priorities, and as a result, Yahoo finds itself at a competitive disadvantage, particularly when it comes to the growing nexus between mobile, social, and advertising."

Schachter said Yahoo's "core business in structural decline...As users migrate away from Yahoo and use mobile devices to access the Internet, Yahoo, and more specifically Yahoo search, will continue to lose relevance."

Yahoo still has a major presence on the Web. But it needs to be able to convert that presence into money--and to expand beyond just the Web.

Updated at 8:16 a.m. PT with comment and further market share data from eMarketer.

 

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