Yahoo!: The New King of News?

In the search for Internet business models, the old-line players remain Absent Without Leave, or AWOL.

AOL business model passing
Many, like the New York Times Co., have given up the search for reach in favor of squeezing what readers they have for cash. This makes them lousy propositions for advertisers seeking reach, or scale for that matter, and such stocks are slowly circling the drain. If you're not buying them for yield – and they killed their dividend years ago – why are you even looking at them?

For a time it seemed that leadership would pass to AOL (NYSE: AOL  ) , especially after The Huffington Post was acquired. HuffPo figured out how to combine news with social networking, and was able to get more reach with the same stories papers like the Times were trying to sell for cash than the Times itself.

But there's a problem with that model. Those who are giving you their raw material for free stop doing so. Creating the material may cost you more than it brings in. This has become clear with the company's network of Patch web sites, which are now being wound-down.

That's why AOL stock has stalled out. Since its claim to have reported revenue growth in February propelled the stock to $37 per share, the stock is down 10%. Revenues for the quarter ending in June were $531 million, just $10 million more than a year earlier, and margins on that revenue are down in the 6% range.

AOL's relative success has been attained by cutting its expenditures, essentially squeezing on all fronts, just like papers such as the New York Times succeeded early in the last decade. But without substantial growth in page views, and top-line revenue, it's hard to see how much further that company can go.

What's left is the Yahoo! (NASDAQ: YHOO  ) business model, which got a boost this week when it poached Megan Liberman from the New York Times as editor in chief for Yahoo! News. This is not a big problem for Liberman, since the Times and Yahoo! have their New York bases in the same building.

Liberman is not a typical Timeswoman. She is given credit for hiring Nate Silver and for creating the paper's blog network, highlighted by the parenting blog Motherlode. She may have been the last business brain left at that dying company. Yahoo! took almost six months replacing the previous head of news, Hillary Frey.

Yahoo! seeks content, can monetize it
Liberman's background is the tell as to what happens next. She's going to be scouring the Web for blog stars she can turn into cash. Much of Yahoo!'s existing content comes from agreements with existing content providers. Many stories from TheStreet.com wind up on Yahoo!, for instance. The service also uses wire copy, and the company has similar deals in other areas, as with Takepart.com.

What Yahoo! can deliver to these sources is reach. By being able to dramatically increase a story's page views, then monetizing that reach through run-of-network advertising, Yahoo! has built a nice second-hand business.

Liberman will be trying to increase the volume of content delivered through this network. Editors will pick through a wide network of offerings in order to fill their own pages and looking for wide circulation.

Google loses? 
As more-and-more newspapers and other media entities put up paywalls, the effectiveness of this strategy increases. Users of Google News often find they can't get to stories from Google (NASDAQ: GOOGL  ) , because of paywalls, but because Yahoo! has financial agreements with the content providers it links to, not only do the links work but Yahoo! has a chance to monetize that content.

This is one reason why Yahoo! stock resumed its upward momentum in September, despite the fact that it has yet to show organic growth – it next reports results in October. Google, meanwhile, has seen its top line stall out. Revenue for the last six months is up only 2% from the previous six months.

The cost of revenue in this business is rather stable. It's sort of like the airline business, in that your load factor determines your profitability. Web companies like Google and Yahoo! have to keep increasing the amount of traffic they carry in order to maintain their fat margins, and any slowdown has to look a little dangerous.

Cash flow is often seen as seasonal in this business, so investors are not yet troubled by Google's slower growth. But quarterly cash flow for Google was little changed in 2013 from its 2012 rate, in the second quarter. If growth is going somewhere else, investors should be careful putting money into a stock with a Price/Earnings multiple near 28, which is where Google's was as this was written.

Investors aren't ignoring this trend. In the last month Yahoo! is up nearly 8% while Google is up by less than 1%.

But here's a second reason to see brighter prospects for organic growth at Yahoo!. Yahoo!'s new iOS application, Yahoo! Screen, provides a preview service for videos that acts, from a financial standpoint, much like the News application does. Before launch the company signed financial agreements with major content providers, including Viacom companies that formerly resisted links from major Web content providers, accusing YouTube of "stealing" their content for instance. Google has won the resulting lawsuits, but this has not made Viacom more eager to do business with it.

Yahoo! Screen can do for Yahoo! traffic precisely what Yahoo! News is doing, only more so. As the value of video traffic is now higher than that for print – it costs more to serve but not that much more anymore – Yahoo! Screen should be a significant profit driver.

Final thoughts
By providing a valid method for content providers to license their material and gain reach, Yahoo! is building a huge content library at minimal cost. As users realize this, you should start to see organic growth in page views, in advertising revenues, and in overall revenues.

The market has not yet caught on to this innovation fully, so you have plenty of time to get in.

The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!


Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2633783, ~/Articles/ArticleHandler.aspx, 8/21/2014 3:18:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement