If Yahoo can't make it, who can?
After the second straight quarter in which the leading Web portal
warned of a major earnings shortfall, all eyes have returned to the health
of the online advertising market and signs of ripple effects that could
drown more dot-coms.
"If Yahoo is warning again, it's got to be pretty ugly," said Jim Nail,
senior analyst for Forrester Research, who had predicted that the online
advertising industry would grow between 20 percent and 25 percent this
year. He now says those estimates could be off.
"Vast chunks of money have gone away. There's been a steep decline from the
dot-coms and only a gradual increase in the money coming from traditional
companies," he said. "This is an adjustment from a market that was fueled
by the Internet bubble and venture capital cash to a market that's driven
by serious marketers, who don't make multimillion-dollar decisions
Yahoo on Wednesday said in a statement that revenue for the first quarter
will be revised to between $170 million and $180 million. The figures are a
far cry from the $232 million in revenue and per-share profit of 5 cents
that Wall Street analysts expected, according to First Call.
The company also said Tim Koogle will relinquish his role as chief executive.
Drops in online ad spending can be largely blamed on dot-com flameouts, such as eToys and Pets.com, whose dollars made up about 69 percent of the money spent on online advertising last year, according to Forrester. As that money started to vaporize, Internet companies dependent on ad dollars
slowly began to choke. Dot-coms including Quokka Sports and Women.com have
withered because of shrinking coffers, and even companies such as crime
news site APBnews.com have burned out.
Although the softening advertising market will likely take down even more
companies, analysts agreed that the survivors will reap the benefits of the
"A likely outcome of this is that we'll see some more of these online media
companies go away the way eToys and Pets.com did," Nail said. The silver
lining is "there will be less inventory and it'll actually firm up prices
for the survivors."
Added Laura Mitrovich, Internet market strategies program manager for The
Yankee Group: "Online advertising is doing OK; it's not growing as
quickly as it has in the past, but it doesn't mean that the industry is not
healthy. It means that some healthy introspection is going on right now."
Internet ad spending softened in the third quarter, marking the first time
Web ad sales dipped from quarter to quarter. For that period, sales reached
$1.9 billion, down 6.5 percent from the previous period, according to the
Internet Advertising Bureau (IAB). But in total, sales were up more than 63
percent compared with the third quarter of 1999.
"Nobody expected the dip because there have been such fantastic growth
rates. The step back was devastating to people, but it doesn't mean the
industry is dead," Mitrovich said.
Such a step back is a boon for Net advertisers, which are reaping the
rewards of cheap deals and better service from online sellers, analysts
say. In addition, ad sellers have begun to search for new ad formats to
reignite interest in Net marketing, which has been bruised by perceptions
that ad banners don't work.
Some industry pundits say that the growth of the last few years has been
the exception, not the rule. Many revenue predictions and business models
have been based on contrived economics, experts say, and the revised
estimates merely reflect more realistic benchmarks.
"Yahoo is not doomed. The fact that it can't meet the previous
stratospheric predictions is no surprise. Now it will operate with a more
realistic market capitalization, business model and revenue stream," said
one industry insider.
Many analysts, however, said they are worried that Yahoo's predicament is
reverberate throughout the industry.
"This is going to fuel the hype even more that the online ad industry is in
trouble," Mitrovich said. The perception in the industry is that many
Internet companies depending on ad revenue can't make the model work, she
said. But many of these companies have not been operating
efficiently, running large organizations and entering into new areas too
"Internet-based companies are under tremendous pressure to turn profits on
a life cycle that is much more compressed than we've ever seen,"
"It's unrealistic to think that some magic can be applied to its business
cycle just because it's distributed through a new channel--and suddenly it
is profitable in a matter of months as opposed to years," she said.
Despite the dire warnings, online advertising is here to stay, financial
"The advertising model can work because I don't see it any differently than
TV and magazines," said Kathleen Heaney, a financial analyst at Blue Stone
"A lot of people are on the Internet, and more and more are coming on every
month. Advertising (dollars) will go where the audience is," she said.
"It's (not) a Yahoo problem, the industry is evolving into the next phase."
Forrester predicts that by 2003 traditional companies will spend roughly
$23 billion in online advertising and digital marketing, compared with
about $6.5 billion this year.
"The 30,000-foot view is that this is a short-term issue, which isn't to
say that it's not ugly and that some companies won't survive before things
get better," said Nail, who added that the first three months of the
year is typically a slow time for advertising.