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Sticking with Yahoo!

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By OldIronsides
March 12, 2001

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First let me compliment Matt Richey on his fine contrarian analysis in "Sticking With Yahoo!" It was a refreshing change of pace from the prevailing media and analytical negativism. (Although I did notice that famed Internet analyst Mary Meeker, too, recently reiterated her belief that Yahoo! was a worthy investment.) As a badly wounded Yahoo! shareholder, my thoughts essentially parallel Matt's.

I certainly hope that Yahoo! will succeed in pulling itself out of its current predicament. Now is the time when I appreciate more than ever its conservative financial approach, strong cash position and absence of debt. When crisis strikes -- Bill Miller (the Legg Mason fund wizard) notwithstanding -- I'd rather have Yahoo! than Amazon to worry about.

I'll be more than happy if Yahoo! can develop some meaningful level of fee-based revenue. But, in all honesty -- and I speak as a dedicated Yahoo! user -- I probably wouldn't pay the fee Matt suggested. The reason is simply that, for me, even such a modest charge is not negligible. I already have too much going out every month. I simply can't afford everything I'd like to have. I know AOL successfully took a different approach, but I think it will be very hard for Yahoo! to transition to something like that at this late stage. For me, the essence of this company's investment story remains the same, and is well stated in Matt's article:

"Granted, Internet advertising in its current form is pretty much dead. But -- but -- I do think the online medium's advertising potential lives on. My premise today is that Internet advertising offers too much profit potential for it not to eventually be successful. The fact is that consumers are gradually spending more and more time on the Internet, and that comes at the expense of other media such as TV and newspapers. Eventually, the marketing dollars will follow the eyeballs -- as Koogle has always said. . . . I have no doubt that technical and creative innovation will continue to improve the effectiveness of Internet advertising. The profit potential of the online medium is just too large for these innovations not to happen -- eventually."

The history of broadcast television, radio, and even newspapers and magazines, all suggest that an ad-based approach with free (or predominantly free) content for consumers should work. Certainly, as long as ad revenue was rolling in, Yahoo's internal economics were outstanding -- as many Rule Maker analyses clearly demonstrated.

It would indeed be ironic if the very aspects of online advertising, which intuitively seem to hold the greatest promise -- measurability and targetability -- instead worked directly against the company by providing lazy ad purchasers with an excuse to say, "We demand more!"

After all, the old industry joke is that "We're wasting half of our marketing budget -- we just don't know which half." Don't companies already have that same option online, even with narrowband? Namely, display advertising (with the newer, larger formats Matt discussed) and "radio" (audio) ads? (And, with the coming of broadband, you can add "TV commercials" as well. In fact, Yahoo! already runs these on Yahoo! FinanceVision.)

It would seem that marketers could already apply all of the existing creativity they've developed over the years in these areas to the new medium. Why shouldn't this work just as well online? The audience is already there, and it is accustomed to such an approach. And, while a world without ads would be nice, there are times, as a consumer, when I'd rather be subjected to ads than to fees. (Even worse, cable TV, which originally held the promise of TV without ads -- in exchange for a fee -- now subjects us to both. So does AOL!)

I have to admit that I'm a little perplexed by the Internet's failure both to adopt old ad forms more aggressively, or to creatively develop new approaches tailored to the new medium. Perhaps those drawn into marketing these days are simply not the creative paradigm-busters that those drawn into technology are. Where's the Bill Gates, the Steve Jobs, of advertising? The potential's certainly there for anyone with the capability to grab it.

My two biggest worries are that the company will be bought out, or that Yahoo's board or management will suffer a failure of nerve. (I hope the latter has not already occurred.)

If I wanted to own some massive old behemoth like AOL-Time Warner, I'd buy the stock. Yahoo! is now the only major pure play Internet company left. (In order to invest in MSN, you'd have to invest in a company whose core business is software, and that is involved in many other things as well. It's a great company, but it's not a pure play Internet venture.) I cross my fingers that the poison pill goes into effect and that the responsible individuals within Yahoo! do not sell out to someone like Eisner or Redstone, or bring a CEO like Diller on board. Sure, I'd lose a breathtaking amount of money (that is, breathtaking TO ME) if the company were to be bought out now. But, as Peter Lynch has pointed out, often shareholders are thrilled at a takeover that results in a pop in the stock price, but in fact would have ended up making far more money over a decade or two if the company had remained independent. Instead, all of that benefit flows to the corporate acquirer (assuming that it can successfully exploit the acquired company's potential).

The other thing I fear is internal panic, loss of vision, and self-doubt on the part of the board of directors and top management. Corporate "leaders" all too often seem vulnerable to groupthink. There's a lot of negativism (and ill-disguised gloating) on the Street and in the media right now. Everyone knows what Yahoo! "should" have done -- or "should" do. Will management or the board capitulate in the face of it? I always admired Yahoo's independent stance, and can only hope that they stick to it now.

So I, too, am "Sticking With Yahoo!" for now. But if the story changes radically -- a takeover, a sudden change of direction -- then I'll probably cash in my few remaining chips and retire a big, big loser. Because even if the new approach should ultimately prove successful (presumably this would take quite some time to confirm, just as the kind of turnaround I'm hoping for will), Yahoo! will no longer represent the story I originally bought into.