Yahoo's Sickly Summer
Revenue Lags Behind Overall Growth in Online Ad Industry
By Yuki Noguchi
Wednesday, October 18, 2006; D01
So what is ailing Yahoo? It announced another soft quarter yesterday at a time when the overall Internet ad market is widely seen as the picture of health.
Yahoo said its revenue growth had fallen behind that of its rivals, and it announced a new ad software system and two investments designed to help it catch up with online-ad leader Google Inc.
Yahoo Inc. still has the world's largest online audience for communications, news, entertainment and social networking services, and when its revenue tanked five years ago, it rebounded smartly.
But things were looking tough yesterday. It reported that third-quarter revenue was up 19 percent, to $1.58 billion, from the third quarter last year -- considerably below the general growth rate for Internet advertising, 37 percent in the first half of the year, according to the Interactive Advertising Bureau, a trade group.
"I am not satisfied with our current financial performance, and we intend to improve," Yahoo chief executive Terry S. Semel said in a conference call yesterday.
He said the lackluster growth would continue for the rest of the year.
Yahoo's quarterly profit fell to $159 million (11 cents a share), from $254 million (17 cents per share).
Yahoo's biggest advertisers had financial problems in the second half of the year, causing them to cut back unexpectedly on Internet ad spending, said Susan Decker, Yahoo's chief financial officer. Those advertisers included automakers and financial companies, Semel said.
Analyst Rob Enderle said that while Google has made bold and risky moves, Yahoo has been less aggressive. "Yahoo seems more tentative and less innovative," making it vulnerable to smaller search companies such as Ask.com, he said. "You can get nibbled to death," he said.
Yahoo shares closed down 3 cents, to $24.15, before the earnings announcement. The stock is down considerably from its 52-week high of $43.66.
Yahoo's slowing ad growth seemed surprising because it comes at a time when many large companies are spending considerably more for online advertising, said Greg Stuart, chief executive of the IAB. Hewlett-Packard Co., for example, increased its online spending to 30 percent of its ad budget, compared with 10 percent last year, he said. Financial services company Fidelity is committing more than a third of its ad dollars to the Internet, Stuart said.
The disappointing results from Yahoo, which helped pioneer online advertising, reflects intensifying competition as the Internet siphons more advertising money from traditional media such as television, newspapers and magazines. Google, which generates the most ad revenue and processes the most number of searches on the Web, has been steadily widening its lead over Yahoo, which is No. 2 in advertising and search.
Both companies run large networks that display ads on sites across the Internet. While still a relatively small industry, Internet advertising has been growing much faster than traditional media. In total, online advertising -- which essentially didn't exist a decade ago -- accounted for about 5 percent of the $267 billion U.S. companies spent on advertising in 2005, according to the IAB.
The largest single source of online-advertising revenue -- 40 percent -- comes from text ads displayed next to search results, with advertisers paying only when someone clicks on the ads that are matched to search queries. Google dominates that business; and Yahoo, whose system is widely regarded as inferior to Google's, has been working for more than a year on new software to serve advertisers. Yahoo yesterday launched the first phase of its repeatedly delayed upgrade.
Yahoo still dominates the next-largest segment of online advertising, consisting of graphical messages in the form of banner ads and other small pictures resembling newspaper display ads, which account for about a third of online ad revenue.
Yahoo of Sunnyvale, Calif., also announced that it acquired AdInterax, which helps advertisers manage, design and track the effectiveness of video ads. Yahoo also said it bought a 20 percent stake in Right Media Inc., which helps ad buyers and marketers trade their services online.
Yahoo did not disclose the terms, but neither deal seemed to be as significant as the one announced by Google this month: the $1.65 billion acquisition of Internet video phenomenon YouTube, which Google hopes will give it access to the nascent market for video ads.
Yahoo and Google also face increasing competition from traditional media, which are using their Web sites to chase online ad dollars more aggressively. "Traditional media are ramping up at a faster rate than new media," said James P. Rutherfurd, executive vice president for private-equity firm Veronis Suhler Stevenson, which produces an annual research report on media spending. Still, 80 percent of Internet ad dollars are controlled by the top 20 sites, Rutherfurd said.