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During Google’s rocky flotation in 2004, investors felt more comfortable with a mutt than a pure breed internet company. Yahoo, with its mix of paid search, display advertising and subscription, looked well-positioned to capitalise on online opportunities. And, unlike search-focused Google, its diversification provided some downside protection.
That was then. Now, with Google recently soaring past $500 a share, investors have rediscovered their love of “focus”. Particularly when that means search-related advertising. Google’s dominance of that fast-growing sector has masked its patchy performance in some other areas. When search finally slows, investors are likely to look more critically at Google’s broad array of initiatives. For now, however, that problem is Yahoo’s.
A senior executive’s recent “Peanut Butter Manifesto” suggested that Yahoo has spread itself too thinly. In some cases, businesses are competing internally. Clearer management accountability and focus on priority projects are required.
But Yahoo’s biggest problem is search. Estimates vary, but Merrill Lynch thinks Google makes 11 cents per US query compared with Yahoo’s 4 cents. The scale of the problem presents Yahoo with an opportunity. Just narrowing the gulf – through its delayed project Panama – would boost profits considerably. If all else fails, there is the nuclear option of trying to outsource search monetisation to Google, as AOL does. That might worry regulators, and Yahoo would lose control of a key revenue source. Yet such a radical move could boost revenues, even after a cut for Google.
On top of Yahoo’s search concerns, there is increased competition from MySpace and others for display advertising. But the group now trades on about 13.5 times 2007 earnings before interest, tax, depreciation and amortisation (stripping out minority investments). Some slower-growing media conglomerates are approaching 10 times. After seeing its shares fall sharply this year, Yahoo may be poised for change – whether through internal action or, feasibly, acquirer interest. It is worth a bet that Yahoo can bring its dog days to an end.