Investors sceptical of Yahoo strategy

Yahoo, the internet portal, is facing investor scepticism over its ability to regain its footing in an online advertising market being changed by Google and social media rivals such as MySpace and Facebook.

Terry Semel, Yahoo’s chief executive, last week pledged to “get back to basics” in an attempt to get the company back on track. Investors appear to be questioning how well Mr Semel and his team can execute on their plan to regain lost ground in search and expand the company’s footprint in graphical advertising and social media.

“The market is saying this management team can’t hack these new challenges,” said Mark Mahaney, an analyst at Citigroup. “It’s possible, and the evidence seems to be mounting that this is the case, but I’m not willing to throw them out yet.”

Yahoo’s shares have fallen more than 45 per cent, while Google’s shares have slipped 2.5 per cent, from peaks in January. Analysts say two big problems lay behind the company’s weak third-quarter performance.

First, Yahoo had fallen behind rivals in its ability to make money from internet search. Meanwhile, Yahoo had begun to lose new users – and new advertising dollars – to fast-growing social networking sites such as MySpace, Facebook and YouTube.

Although Yahoo announced last week that it had launched the first phase of “Project Panama” – a new search technology designed to improve the revenue Yahoo generates from search queries, the company is not expected to see any financial benefit from it until the middle of next year.

“Google’s superiority [search monetisation] allows it to invest hundreds of millions more than Yahoo in infrastructure and R&D,” said Henry Blodget, an analyst at Cherry Hill Research.

Yahoo took the early lead in social networking last year with the acquisition of Flickr, a popular photo-sharing site. In May, Yahoo said Flickr and its other social sites would form the basis of a new search strategy.

Since then, however, Yahoo’s efforts have been overshadowed by a number of high-profile deals by rivals, including Google’s $900m search advertising deal with MySpace in August and the $1.65bn acquisition of YouTube this month.

Microsoft also joined the fray by inking an advertising deal with Facebook.

Although Yahoo and Facebook have been reported to be in buy-out talks, Yahoo executives say the company does not feel under pressure to do a big social media deal.

Bradley Horowitz, Yahoo’s vice-president of product strategy, said the company has the ability to grow its audience by driving new users to its existing social sites. “When we look at what we need to acquire, we look at what we have in our pocket.”