Forgive my skepticism over Tom Taulli's admiration of Yahoo!'s (NASDAQ:YHOO) social media and the related concept of the network effect. Much of the dot-com mania was based on the theory that the first movers would be the ones to thrive, thanks to the power of network effects. Yet even an arguably successful network-effects company such as auction site eBay (NASDAQ:EBAY) is trading around 45% below its 2004 high. As eBay is painfully finding out, building a network is tough enough, but growing profits based on one is something else entirely.
As for Yahoo!'s acquisition binge, ask Fool co-founder Tom Gardner, Peter Lynch, or the late Peter Drucker about diworsification and what it tends to do to companies. Whether it's Yahoo!'s push into auctions, social networking, or travel, the further it strays from its roots, the more moving parts it needs to keep coordinated if it wants to succeed. Tom Taulli himself pointed out that Google (NASDAQ:GOOG) has failed to truly monetize much beyond ad-supported search. Why is Yahoo! likely to succeed in diversifying beyond advertising revenue when Google has yet to?
Speaking of that cash cow of advertising -- it is a finite pie. Ask traditional television networks such as CBS (NYSE:CBS) and Disney's (NYSE:DIS) ABC how their recent advertising markets have been doing. With cable and satellite TV, commercial-skipping digital video recorders, and a move toward getting entertainment from the Internet, that pie keeps getting sliced ever thinner. If a business depends on ad revenue alone, it's in trouble. With so many options available to them, advertisers have more power to switch to whatever's the most cost-effective than ever before.
Yes, as contradictory as it may seem, I am concerned both about Yahoo!'s dependency on ads and its attempts to diversify its business. The company looks to be stuck between a rock and a hard place. I'm not quite sure its shares, though down from their highs, reflect just how tough the fight going forward may be.
Duel on!
- Read the bull argument
- Read the bear argument
- Read the bullish rebuttal
- Sound off on Yahoo! in Motley Fool CAPS
- Vote for the winner
Yahoo!, Disney, and eBay are all Motley Fool Stock Advisor recommendations. Get your free Stock Advisor market report today!
At the time of publication, Fool contributor Chuck Saletta had no ownership stake in any of the companies mentioned in this article. The Fool has a disclosure policy.
