Post of the Day
February 16, 1998
From our AOL
Subject: Thoughts on competition
There has been a lot of talk on this board about competition, and its potential effects on Yahoo. Personally, I think those who think that Yahoo won't get crushed by competition are missing the point. In particular, there are a few points that I think are worth addressing.
Can Yahoo Maintain Leadership?
Yahoo is a leader in a narrowly defined space now. (AOL and the Microsoft properties both more hits than Yahoo does.) But how long will leadership last? AOL hadn't really paid attention to Yahoo as a competitor until a few months ago (when the "starting point" concept began to gain legitimacy.) Since then, AOL has stepped up its efforts to compete using AOL.com. In addition, Microsoft is coming on strong. Currently, Microsoft's hits are not measured accurately because MSN isn't counted with Microsoft (are they really different companies?) Netscape.com is a leading web site because of its existence as a default. Won't Microsoft's new start.com page gain these default hits as well. For Yahoo to continue to be relevant, it will need to advertise heavily to overcome Microsofts installed advantage. I think that Microsoft will probably own this space before year's end. Other crumbs will fall to start pages preloaded by ISPs and other service providers. (They didn't appreciate the value of owning the default page until more recently.)
Does the Space Yahoo Leads In Matter?
Who cares about this space? After all, the business is based on selling ads and, to a lesser extent, commerce. Anyone can sell ads, and the fact that they are a commodity has been played out over and over again. As for commerce, Yahoo hasn't really done well here at all. Expedia and CarPoint, Microsoft's properties, are doing far far better than their Yahoo counterparts. Yahoo just announced another big Chat deal, but does anyone think that the Chat ads have any value greater than television ads? (CPMs of $1 to $2.) Besides, Yahoo has to share the money with their co-sponsors. This deal will be a loser for them. The only thing Yahoo can really do well in by itself is selling words for searches. But will this be enough? Not if this late in the game, banners and porn ads combine for 80% of revenue. Besides, they aren't a particularly useful search engine.
Are Internet Ads Enough for a Business?
But there is more than just banner ad competition that will be tough for them. Think of it this way. Imagine you are a marketing person, and are trying to plan your advertising for the year. (Note that within this class, relatively few people appear to be looking at Yahoo.) Your choices include print and broadcast media, with CPMs that cost about $2, direct mail, internet ads, highway billboards, stadium signs, and a host of other choices. There are so many choices. How to decide? Price per impression is a great place to start.
Well, ads on Yahoo are the most expensive per hit, costing more than everything but direct mail. Ads on other sites are about 15% the cost of Yahoo. Even then, the value of this medium is of dubious quality. My.Yahoo, for example, refreshes itself automatically every ten minutes, meaning you might buy ten ads for someone who left their browser on in the background while they go to lunch. If they have a browser on in the background all day, count that as one or two dollars in wasted ad money. So Yahoo has a tough sell in the online space for generic ads, or ads targeted to markets where other players have strong web sites.
But that assumes you as a media buyer see much value in internet advertising at all. Six months ago, Yahoo claimed they were running ads for over 1,000 companies. Now, all I see when I visit their space is ads for yahoo clothes, credit cards, other web sites and free cars. Proctor and Gamble never showed up. I think the lack of name brand advertising, and the preponderance of unprofitable companies that do buy ads, shows that this is a poor market to be in.
Then Why is the Company Doing So Well?
Having the highest ad rates in a questionable medium ONLY works when the buyers are na�ve and you are the leader. Neither of these states will be true for long. Besides that, it is easy to show momentum when you are small, but as markets develop, the work becomes a lot harder. The stock has clearly done far far better than the company has, and this too can only be temporary.