Yahoo's Business Model and Growth Strategies

Yahoo's Business Model and Growth Strategies 

Yahoo

Yahoo is engaged in providing web-based search services, auction services, and internet shopping and email services. The company calls itself a provider of content and communications, making a distinction from Facebook, which is involved in social networking, and Google, which offers search.

Yahoo’s business model

The company’s revenue sources comprise of marketing services revenues and fees revenues.

• Marketing services revenues – Yahoo’s online advertising offerings include display advertising, search advertising, listing-based services, and commerce-based transactions. The company gains revenues from display advertising on Yahoo properties and on affiliate sites, which are delivered as “impressions” or “click-throughs”.
• Fees revenues – Fees revenues are generated from a variety of consumer and business fee-based services, including internet broadband services, premium mail, music, and personals offerings, as well as services for small businesses. It gets fees revenues when these services are performed. Revenues are also generated as royalties received from joint venture partners.

Yahoo’s advertising revenues

Yahoo’s revenue declined by 10.2% in 2009 to $5,674m from $6,316m in 2008, largely owing to declining demand for its marketing services and also due to foreign currency rate fluctuations. Marketing/ad services, which constituted 87.8% of total revenues, experienced a 10.2% y-o-y decline over 2008.

T

Table 9: Yahoo advertising revenues ($m), 2007–09
	2007	2008	2009
Total revenues	6,969	7,209	6,460
Ad revenues	6,088	6,316	5,674
Ad revenues (% of total)	87.4%	87.6%	87.8%
Fiscal year end December, 2009

Source: Company information

Yahoo’s strategies

In 2009, Yahoo entered into a 10-year agreement with Microsoft to use its Bing search engine to power searches on Yahoo websites. The company believes that this step would reduce the costs of competing with Google and improve its market share. Under the agreement, Microsoft will pay traffic acquisition costs at a rate of 88.2% of search revenue on Yahoo’s owned and operated sites for the first five years. Yahoo will still sell search ads, and create its own search experiences, but the algorithms will be Microsoft’s. By 2013, Yahoo expects the Microsoft deal to be producing at least $650m in annual savings.

However, Yahoo prefers to give priority to its own sites when providing users with search results supplied by Bing. Yahoo provides a list of search results, related topics, and images, the latter of which retain a frame of the Yahoo page at the top of the screen even if the links go elsewhere. This strategy will help Yahoo to earn more revenues.

In Japan, Yahoo is outsourcing its search activity to Google. The company will have a solid search engine to drive its back end and cut costs, while Google will deal with more than 90.2% of all search queries in Japan. Google will not only take over the paid search platform, but also supply the organic search results. Japanese advertisers are raising concerns about this development and say that it could create a monopolistic market.

Yahoo has witnessed a steady decline in its search market share for many years, largely owing to its home page being more focused on editorial content rather than search. ComScore reported that during the period of January to April 2010, unique US visitors to Yahoo rose by 4.3%, well below the 10.2% overall industry growth. Total minutes spent on Yahoo fell 11.5% in that period, while page views fell 13.3%, both metrics that saw double-digit percentage growth for the industry as a whole. Additionally, comScore reported that Facebook surpassed Yahoo in its share of display-ad impressions. The recent troubles have resulted in a growing turnover at the top executive level, while its share prices have been steadily declining

To counter this declining market share, Yahoo is focusing on innovative verticalized search within specific categories like sports, movies, and business. The new concept is referred to as the "web of object" philosophy. It is also incorporating visual search, with videos, images, articles, and tweets on a single page. One can also search in local vernacular or through a map.

Countering Google’s challenge in core display business

Yahoo owns the largest display ad exchange and has the most media properties, such as its news, sports, and finance pages, for which display ads can be sold. Yahoo also launched a lifestyle section in 2010, as it strengthens its commercial potential via content. The portal is in the process of finalizing editorial and video content licensing deals, with content providers across relevant categories including food and drink, family and parenting, relationships, health, and fashion and beauty.

However, the display ad business has been an increasing area of concern for the company, especially as rates of CPM in the industry have been on the decline and Yahoo is still searching for strategies to counter this. The primary reason for this is that companies such as Yahoo are under pressure in recent times as marketers question the effectiveness of the ads, partly because only a tiny fraction of the consumers who visit a webpage actually click on the links.

To make display ads more attractive, Google, Yahoo and other technology companies have developed new ad-exchange systems that give marketers the ability to target ads to niche audiences. Now, they are powering these systems by entering into partnerships with ad companies and websites.

Additionally, Google has moved aggressively in recent quarters to build a display advertising operation to complement its dominant search ad business. However, Yahoo is confident that Google's search advertisers are small businesses that will not necessarily want to move into display ads.

M&A deals strengthen advertising business

In 2010, Yahoo acquired media aggregator Associated Content for $100m in response to the growing importance of search-generated content. Associated content employs agencies such as Demand Media, which uses freelance writers to create an online library of more than a million instructional articles. Through this acquisition, Yahoo is attempting to create content based on audience insights and their needs. It is also reaching out to a larger Arab audience with the acquisition of Maqtoob, an online community.

Industry experts say that with these acquisitions, the company is moving away from being a technology company and becoming a media company. However, Yahoo asserts that it is a technology company that runs a media business.

Strategic initiatives are aimed at transforming the firm into a content company

Following the disastrous mismanagement of a takeover bid from Microsoft in 2008 that triggered a 60.2% decline in Yahoo's stock price, a shareholder revolt, and co-founder Jerry Yang stepping down as CEO, the company has embarked on a strategy of transformation.

As Yahoo struggled with declining revenue and profit, CEO Carol Bartz, who took over the reigns in January 2009, immediately oversaw the layoff of 800 employees and began selling off pieces of the company that she said were outside Yahoo's core focus. For instance, the company sold its online recruitment website HotJobs for $225m to Monster. It also outsourced its search business to Microsoft and started developing a new identity as an internet company that provides media content. Yahoo also launched a massive $100m “It’s Y!ou” ad campaign globally to help improve its fortunes.

Moreover, Yahoo wants to expand its audience, especially in emerging markets where internet use is still growing rapidly, and to package that audience in ways useful to advertisers. Yahoo believes that its popular finance, sports, and news websites are key differentiators that will help in boosting its ad business. Its content websites are also cheap in maintenance terms, since they are aggregators republishing other websites’ content rather than producing their own.

However, in the content space, Yahoo faces intense competition from AOL, The New York Times, News Corporation and so on. The company offers little that is unique, and users will not be attracted to a website when better content is just a click away.