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Commentary: Yahoo loses its exclamation point

The company's birthright as the sole must-buy Internet advertising location fueled its huge growth, but it now needs to re-focus on its profit-generating areas.

    By Whit Andrews, Gartner Analyst

    Yahoo's birthright as the sole must-buy Internet advertising location fueled its extraordinary growth from 1995 to 2000.

    See news story:
    Analysts: Yahoo stock remains too pricey

    The company used its massive revenue stream, and the independence it brought, to drive innovation in its business model. Yahoo now possesses the Web's most successful mall, a leading broadcast network, community framework and homepage hosting network. It owns every aspect of its business in which customer profiles are gathered or accessed.

    Yahoo has not, however, successfully tied all those aspects of its business infrastructure to profit-generating systems. Moreover, it is not as if Yahoo never saw the advertising slump coming. Through acquisition and development, the megahub established product sets for most aspects of individual or enterprise Internet use.

    Those initiatives have not accounted for a sufficient portion of the megahub's business to shore up its revenue amid the North American economic slowdown, which has hit the Internet sector especially hard. Yahoo's extraordinary success in the now dyspeptic advertising market has amplified the damage to the company's fortunes.

    The central question--for all who are not investors--is whether Yahoo can use its pre-eminence among Internet users to capitalize on fresh business opportunities. (For investors, of course, the question is how other investors will react to the same question.)

    The answer is yes, but lack of time could diminish the positive outlook. No Internet-based or old-world firm has the breadth of offerings that Yahoo can claim in providing services to small businesses or individuals. Yahoo's enterprise story remains in its earliest stages but is still farther along than others. However, the impatience of investors to see Yahoo's opportunities materialize severely reduces the amount of time left for the company to record substantial revenue and profit from its nonadvertising sources.

    Having taken a "poison pill" to deter hostile takeover attempts, Yahoo faces substantial challenges in capitalizing on its diverse opportunities.

    Although Yahoo has expanded its advertising footprint to include customer intelligence, retail placement and direct marketing, it has not developed the swarm of small-business, small-billing customers it needs to insulate itself from ad-market volatility. Moreover, Yahoo will be unable to charge surfers for premium services except indirectly via distribution providers, which will recognize Yahoo's vulnerability and pressure it for better prices.

    (For related commentary on business problems suffered by dot-com companies, see registration required.)

    Entire contents, Copyright ? 2001 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.