65298-Yahoo-Case-Analysis

swot of yahoo

Yahoo!

Case

Analysis

May 9 2007

The strategy of implementation of an established dot com company, struggling

to leverage current advertising methods with business objectives

Jason Drohn Bradley Bierer Carol Woods Michelle Victory Paul Rapela

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Table of Contents

Executive Summary 3

History: 5

Problem 7

Competitive Analysis 9

Yahoo Financials 12

Economics 19

Demographics 23

Market Analysis 30

CPM 34

SWOT MATRIX: 36

QSPM 38

Space Matrix 39

Strategic Issues 42

Strategy Implementation 47

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Executive Summary

Yahoo has grown up as a portal company They learned early on that by being sticky, by having a web presence that forced users to stay on their site, they could find ways to profit from the page views This has led Yahoo astray though Not only has Yahoo given up overall profits in search of ever expanding user acquisition, they have allowed their search product to fall behind

Google, Yahoo’s chief competitor, has mastered the art of monetization, namely

through contextual advertising Contextual advertising is when a small piece of programming code is inserted into web pages which actually interprets the text and serves advertising based

on keywords Google’s offering, Adsense and Adwords, produces 99% of the company’s profits This advertising network is built into both their search and branded sites Web publishers are also growing to adopt Google’s version of website advertising to gain monetization for their own traffic

Yahoo has adopted this model of contextual advertising that has been so profitable for Google, but have yet to refine it enough to make a serious impact on the market The program

is still in beta (the internet’s way of saying under-construction) and has not made any headway

at attracting new publishers or advertisers

The primary disconnect in the Yahoo model has been the lack of precision, because their search algorithm needs to be updated The ad network fails to interpret that an article is

written about cars, and serves ads about entrepreneurs Money is only made if a user clicks on the advertisements This is an interesting dilemma

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On the positive side, Yahoo has a brilliant banner serving system Since Yahoo still sees itself as a portal, it still leverages Yahoo Money, Cars, Email, etc Each of those sites has products or services that provide value to the user A user shopping for cars is later targeted with banner ads reflecting the cars that they were viewing online

In our estimation, Yahoo needs to focus on core content by improving exactly what it is that makes them money They should focus on improving their ad network’s efficiency and allowing all publishers admittance They should leverage their banner serving software with the contextual market and provide growth that way

Google, the market leader, is simple and built around search Yahoo needs adopt a like philosophy to remain competitive in their market

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History:

Yahoo! Incorporated is an Internet service provider that serves both users and business globally The company was founded in 1994 by David Filo and Jerry Yang who were attending Stanford University’s PhD program (The History of Yahoo!) Yahoo! Inc began as a hobby for Filo and Yang and has now evolved into a multifaceted brand that serves internet users

worldwide (The History of Yahoo!) Yahoo! Inc has become the world’s largest global online network of integrated services (The History of Yahoo!) According to the Yahoo! Inc website, they have become one of the leading search engines on the World Wide Web (The History of Yahoo!)

Yahoo! Currently has 500 million users worldwide that visit the site each month Yahoo!

is provided to users in more than twenty different languages (Yahoo! Inc) The company also has office locations in Europe, the Asia Pacific, Latin America, Canada and the United States (Yahoo! Inc) Yahoo! Inc is currently headquartered in Sunnyvale, California (Yahoo Inc)

Yahoo! Inc was incorporated in California in March of 1995 (Yahoo! Inc) Yahoo! Inc first went public on NASDAQ in April of 1996 At this time Yahoo!’s stock opened for $13.00 per share (Yahoo! Inc.) At the close of its first day of the IPO, Yahoo! stock had reached a closing price of $33.00 per share (Yahoo! Inc) At this time the company only had 49 employees

(Yahoo! Inc) The company was then reincorporated in Delaware in May of 1999 (Yahoo! Inc)

In December of 1999 Yahoo! Stock was added to the S&P 500 (Yahoo! Inc)

In 1996, Yahoo! Inc began entering into joint ventures with SOFTBANK (Joint Ventures) Through this initial joint venture, Yahoo! Inc was able to create Yahoo! Japan Subsequently

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Yahoo! Inc has teamed with SOFTBANK to create markets in Germany, United Kingdom,

France, and Korea (Joint Ventures) Yahoo! Inc and SOFTBANK have also created GeoCities Japan Corporation to create and manage a Japanese version of the GeoCities website (Joint Ventures)

Yahoo! Inc has also teamed in a joint venture with VISA to establish Yahoo!

Marketplace (Joint Ventures) This joint venture occurred in August of 1996 and has since then created a navigational service focused on information and resources for the purchase of

consumer products and services over the internet (Joint Ventures) This joint venture alone created a new market for Yahoo! Inc (Joint Ventures)

Most recently, in January 2006, Yahoo! Inc and Seven Network Limited , also known as SEVEN, have teamed in a joint venture as well (Joint Ventures) SEVEN, an Australian media firm, signed an agreement with Yahoo! Inc (Joint Ventures) In this agreement, Yahoo! Inc (Joint Ventures) contributed its Australian internet business, Yahoo! Australia and New

Zealand, and SEVEN contributed its online assets, television and magazine content (Joint

Ventures) Yahoo! Inc has a fifty percent equity ownership in the joint venture which will operate under the name Yahoo7 (Joint Ventures)

Yahoo! Inc also operates Flickr, a photo sharing and storing website (Yahoo! Inc profile) The company also provides its users with web mail, instant messaging, music, video, personals, and much more (Yahoo! Inc profile)

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Problem

Yahoo is a master of portals, but they have let their search product suffer They have long built out their offering in such a way to add value to their users through functionality while they hoped that revenue would be made in the process There was no clear attempt to either target those users with advertising or extend any real value added services

This portal terminology has run so deep that it is engrained in the Yahoo culture Search

is a product of users making their way through the Internet, rather than the core of their

business Yahoo sees their core business as being Yahoo News, Finance and Mail They have made acquisitions such as MyBlogLog and Flickr For what though? To extend functionality or

to increase revenue

The all inclusive Yahoo is counting on the traffic to be monetized through private

advertising deals and partnerships Partners usually pay to have their service included in the Yahoo Directory in one form or another These joint partnerships are encouraged because it not only brings Yahoo recurring revenue, but allows the partner a strategic place in the Yahoo network The partnering service typically sees a boost in traffic, thanks to being networked with such a big web presence

Private advertising comprises the other side of the revenue deal Private advertising is such that a company may put their banner in a prominent location of the Yahoo network Similar to partnerships, the private sponsors are limited to the banner placements that are bought For example, Newegg.com, a well known computer retailer, might put a banner ad on

Yahoo is the most trafficked website on the planet More pageviews are served from Yahoo servers than any other company in the world Why is it that they are trailing Google in revenue then? Because Google allows other publisher’s to maximize the ad network 82% of Google’s revenue is achieved not on their site, but on other web publishers

The first key difference to note is the fact that each company differs in its primary company beliefs Yahoo sees itself as a portal “to connect people to their passions, their

communities, and the world’s knowledge (Yahoo 10K).” Google’s maintains the largest, most

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comprehensive index of web sites and other content, and makes this information freely

available to anyone with an internet connection Their automated search technology helps people obtain nearly instant access to relevant information from our vast online index (Google 10K).” Microsoft’s offering, MSN, “provides personal communications services, such as email and instant messaging, and online information offerings such as MSN Search, MapPoint, and the MSN portals and channels around the world (Microsoft 10K).” AOL is simply an internet service provider who combines the leverage of the Internet with its own branded services

Although each of these competitors has aligned themselves in the same sector

investment wise and serve the same relative target markets, they define their services

differently In some sense, this demonstrates how they align their business model as well Google lives by its advertiser network, also known as the Google Network, comprised of

Adwords and Adsense The combination of the two services provides Google with 99% of their revenue The revenue may be further divided between 18% on site advertisement and 81% off site advertisement Adwords is an online application that allows businesses to publish their ads

to the many websites that participate in the Google Network Adsense is the destination for web publishers and site owners who have space on their website for ads The webmasters make money every time a Google ad is clicked Google is essentially the middleman

Yahoo takes a different alternative to the system Being the most trafficked website on the planet, Yahoo sells ads for its own network of sites But as the 10K notes, Yahoo sees itself

as a gathering place for people to connect with their passions Yahoo’s specialty ‘pre-Google’ has been monetizing its own web pages

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Yahoo’s ad network has proven effective on the front of intelligent ad serving The algorithm is built in such a way that it can see where a visitor is going online, within the Yahoo network, and serves ads based on those tendencies For instance, if you are looking at a car in Yahoo Autos and travel to Yahoo Money, you will see a car advertisement This data is stored for an indefinite amount of time, so in three months a random car ad may show up again

Yahoo has only just recently launched an Adwords and Adsense competitor though Yahoo’s service is named Yahoo Publisher Network Yahoo Publisher Network allows the same functionality that the Google Network does, but is currently in beta The company has yet to solidify its stance in the market concerning the advertising software

As Yahoo states in their 10K, “The principal competitive factors relating to attracting and retaining users include the quality and relevance of our search results, and the usefulness, accessibility, integration and personalization of the online services that we offer as well as the overall user experience on our website In the case of attracting advertisers, the principal competitive factors are the reach, effectiveness and efficiency of our marketing services as well

as the creativity of the marketing solutions that we offer.”

They also add, “We believe that we are effectively competing in the Internet services market as we continue to refine our search technology, build onto our existing online

properties and services, and further improve our users’ experience.”

From this, one may conclude that Yahoo services play a key role in attracting and

retaining users Whereas, Google has recognized that search is their primary objective

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Yahoo Financials

Yahoo trades on the NasdaqGS under the symbol, “YHOO.” For slight comparisons, to show where Yahoo needs to be, we are going to compare several key statistics with Google’s results

With a 52 week range of 22.65 to 28.86 and a volume of 21,102,256; the stock itself is well traded The current P/E of 55.57 seems high, especially when compared to the much more profitable Google; which has a P/E of 48.18

Here is a snapshot of the top level financials for Yahoo at the time of writing:

Across the top level, revenue has been strong as well since 2002 2006 revenues come in at 6,425.7 (in millions) Looking at the company snapshot:

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However, in terms of Google, Yahoo’s chief competitor, there is a discrepancy Google grew revenues to 10,604.9 (in millions) since the time of IPO offering in 2003 There revenue is as follows:

Key Ratios:

Profitability – Upon further examination of Yahoo, the key ratios include:

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Cost of goods sold has increased as one might expect, throughout the ten year span of public trading This is largely due to the increase of server space and supplemental acquisitions the company has made These acquisitions include services like Flickr and MyBlogLog

Research and development is sitting at 13% in 2006, which is higher than Google’s (which comes in at 11.6%) This is a positive mark for Yahoo

The EBT, or earnings before tax, as dropped to 17.1% - from 48.4% This is a cause for concern Google’s stands at 34.9 to 37.8 for the last two years

In dropping to the profitability section, Yahoo’s tax rate is 41.7%, up from 30.2% This is not the highest it’s been, though In 2000 it was 72.7% Google sits at 23.3%

Perhaps the biggest discrepancy I can see is that Yahoo’s return on assets dropped from 18.95% in 2005 to 6.73% in 2006 Google remains strong at 21.41%

Yahoo Growth rates are the most alarming section in this analysis though

Growth Rates-

Yahoo’s growth rates are as follows:

As pictured above, Yahoo had amazing growth in the late 90’s and in 2003 and 2004 However, Google was has stormed on the scene, taking the search and advertising market that previously served with banner ads You can see this reflected in Yahoo’s falling numbers

Yahoo’s Cash Flow:

Yahoo’s operating cash flow was down last year, -19.9%, and their free cash flow growth year over year was down -47.6% This could be because of several high priced acquisitions

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Google’s Cash Flow:

Google didn’t have a stellar year, in regards to cash flow and in comparison to their last couple, but they still remained in the positive, sitting at 45.6% That number may have been reduced because of the YouTube acquisition

Financial Health-

Yahoo’s financial health is a point of concern, because their cash and short-term

investments have been decreasing year after year Accounts receivable inventory has remained constant, and their current assets has been around 2% for the last five years

In regards to total current assets the company has noticed a drop year over year in Total Current Assets, landing at 32.6% in 2006 Intangibles and Long Term Assets are at 29.3%

though I would imagine these stem largely from their offices and datacenters spread around the world

The largest concerning factor in this financial analysis is the debt of Yahoo, as compared with Google Yahoo has 9% Accounts Payable, but 9.1% of Accrued Liabilities and 2.8& Short Term Liabilities Their Long Term debt is at 6.5% which they just picked up in the last 4 years

Altogether, Yahoo’s liabilities total is 20.4%, leaving the stockholder’s equity at 79.6% This might seem like an advantage to some, because they are leveraging debt to magnify

earnings, but if you continue further down, the current ratio is 2.54 and the quick ratio is 2.4 The company isn’t going bankrupt, but has been trending down badly in the last four years

Google on the other hand demonstrates only 7.8% liabilities, allowing the other 92.2%

to be owned by the stockholders They have a Current ratio of 10 and a quick ration of 9.63

The following two pages offer printouts of the full financial statistics

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Yahoo’s Financial Health:

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Google Financial Health:

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Economics

Economics is defined as, “the social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.” There are many factors and indexes that are tracked to gauge the health of the economy These include gross domestic product, consumer price index, and strength of the dollar, interest rates, and disposable income

Yahoo, Inc relies heavily on accurate information pertaining to all these factors

associated within our economy Not just what the consumer is spending, more importantly how the economy is doing as a whole Yahoo’s expenditures by advertisers tend to be cyclical,

reflecting overall economic conditions and budgeting and buying patterns Since Yahoo derives

most of their revenues from advertising, any decreases in or delays in advertising spending due

to economic conditions could reduce their revenues or negatively impact their ability to grow

their revenues Yahoo relies on the value of their brand and a failure to maintain or enhance

the company brands in a cost-effective manner could harm their operating results (10K) Yahoo

believes that maintaining and enhancing their brand, specifically those that contain the Yahoo

name as well as those that do nothing, is an important aspect of their efforts to attract and expand their user and advertiser base

Yahoo has spent considerable money and resources to date on the establishment and maintenance of their brands in which they anticipate spending increasing amounts of money

on, and to devote much greater resources strictly towards advertising, marketing and other brand-building efforts to preserve and most importantly enhance the consumer awareness of

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their brands The success of Yahoo is depended upon us, the consumers and much money we

are willing to spend on the Internet

Spending and the availability of monies is not just a major concern with Yahoo, it is with all other Internet Service Providers The fear is the increase of CPI indexes and the possibility of inflation The consumer price index (CPI) is a tool used to gauge the economy The CPI is most commonly used to measure inflation, and businesses use it as a guide in making economic decisions The CPI is an index of prices used to measure the change in the cost of basic goods and services in comparison with a fixed base period.(American heritage dictionary) The CPI includes all goods and services purchased by urban households The prices that are used to calculate the CPI are taken from 87 urban areas throughout the country

The CPI is computed as a percentage of the cost of certain products as compared to a base year (The American Heritage® Dictionary) The current base year is 1982-84, which equals

100 percent Any number above 100 indicates that prices for that year are higher than in the base year The most current CPI statistics from the Bureau of Labor Statistics (BLS) are for February 2007 During February 2007, the CPI rose by 5 percent to a level of 203.499 This figure means that consumer prices for February 2007 were 103.499 percent higher than in the base year This was an increase of 2.4 percent since February 2006 The CPI is divided into several different sections Sections include housing, food and beverage, transportation, and energy The index for food and beverage increased 8, housing 4, transportation 1, and energy 9 during the same time period

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When consumer prices rise, everything else seems to follow The increases will affect Yahoo’s business relationships with the third-party content providers, which will become critical to their success As competition for compelling content increases the prices at which they offer their content to them and potential content providers may not offer their content to Yahoo on terms that can be agreeable to them An increase in prices charged by the third parties to them could harm their operating and financial condition Further, many of Yahoo’s content licenses with the third parties are non-exclusive Accordingly, other webcasters and other media such as radio or television may be able to offer similar or identical content This increases the importance of their ability to deliver compelling editorial content and

personalization of this content for users in order to differentiate Yahoo from Google and MSN

If Yahoo is unable to license or acquire compelling content at reasonable prices, if Google, or MSN broadcast content that is similar to or the same as that provided by Yahoo, or if they do not develop compelling editorial content or personalization services, the number of users of their services may not grow as anticipated, or may decline which could harm their operating and financial results (10K)

Interest rate changes will affect the operating expenses of Yahoo, their third- party affiliates’ and their competitors Interest rates are controlled by the policy makers of the Federal Reserve Board.(FED) The rates established by the FED are used by banks and lending institutions to set the interest rates for loans and credit cards By manipulating the federal funds rate, the FED tries to control inflation and keep the economy strong while preventing a recession The FED sets this rate at a level to keep the financial and monetary conditions of the

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economy in line and adjusts the rate for changing economic conditions A change in these rates

by the FED, or the expectation of a change, can trigger changes to the short term and long term interest rates, the foreign exchange value of the dollar, and stock prices Changes in these rates affect the spending decisions of both households and businesses.(federalreserve.gov)

The FED raises the federal funds rate to slow down economic growth and curb inflation They lower the rate to stimulate a sluggish economy and encourage growth Since June 2006 the federal funds rate has been stable at 5.25 percent During the prior two years, the FED has raised the federal fund rate 17 times Should we be concerned? Should Yahoo, Google and others be concerned? Yes, as noted earlier when the cost of items increases so will others soon

to follow The increase in interest rates will affect the anticipation of Yahoo’s much needed expansion into the world of cyberspace

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Demographics

Internet World Stats (2007) reports as recently as March 10, 2007, Yahoo! has a

potential global customer base of 1,114,272,426 people who access the Internet The usage growth period charted is for the years 2000-2007 Of the data presented Asia, Europe, and the Untied States are the three top users of the Internet globally Africa, Asia, Middle East, and Latin America/Caribbean reflect the largest usage growth while North America reflects the lowest growth percentage rate globally in the charted period

WORLD INTERNET USAGE AND POPULATION STATISTICS

World Regions Population

( 2007 Est.)

Population

% of World

Internet Usage, Latest Data

% Population (

Penetration )

Usage

% of World

Usage Growth 2000-

%

208.7

% NOTES: (1) Internet Usage and World Population Statistics were updated on Mar 10,

2007 (2) CLICK on each world region for detailed regional information (3)

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Demographic (Population) numbers are based on data contained in the world-gazetteer

website (4) Internet usage information comes from data published by Nielsen//NetRatings, by the International Telecommunications Union, by local NICs, and other other reliable sources (5) For definitions, disclaimer, and navigation help, see the Site Surfing Guide (6) Information from this site may be cited, giving due credit and establishing an active link back to

www.internetworldstats.com Copyright © 2007, Miniwatts Marketing Group All rights reserved worldwide

Internet World Stats (2007) illustrates that North America had the lowest usage growth rate by world region, but does reflect the highest Internet global penetration

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Internet World Stats (2007) presents the following pie chart of the world Internet user

The World Bank Group (2007) charts internet user data The user data can be

disaggregated into many forms of information such as: gender, age, frequency, and household income The available information on the use of the Internet globally is inadequate in scope due to the limited number of countries which collect information and communication

technology making it difficult to ascertain the market for global Internet industry (pg 1)

The United States provides the most information on the use of the Internet in the North American Region The following World Band Group graph was last updated January 11, 2007

Demographics of Internet Users

Below is the percentage of each group who use the internet, according to our

December 2006 survey As an example, 69% of adult women use the internet

The Pew Internet Organization (2007) provides valuable information on the

demographics of Internet users in the United States The information reveals a large block of the U.S populace which actively uses the Internet The largest segment of the U.S populace is

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the 18-29 age groups with an 83% usage rate Following closely behind are the 30-49 age groups with an 82% usage rate and the 50-64 age groups reflecting a 70% usage rate Race and ethnicity reflect percentage rates of White’s as the largest users of the Internet (pg 1)

American demographics (2007) says the Hispanic race is the fastest growing population

in the United States Changes in the Hispanic race have increased by 3.3% between 2004 and

2005 (pg 12) Combing the American demographics (2007) and the information drawn from the World Bank Group (2007) chart data reveals, the Internet segment for the Hispanic

populace is expected to grow as Hispanic’s trail only slightly in the percentage rate of White users

The World Bank Group (2007) chart reflects nearly half of the households with less than

$30,000 in household income use the Internet The usage rate does rise upward as the

household income increases The income level tops out with a 93% usage rate for household incomes of $75,000 plus According to American demographics (2007) the average family income is $46,326 per year (pg 2) Combining the American demographics (2007) data and that of the World Bank Group (2007) reflects that the Internet user rate in the United States is

at 75%, as of January 11, 2007

The World Bank group (2007) charts shows Internet usage increases dramatically with the amount of formal education the user possesses The users with less than a high school education are the lowest Internet users with only a 36% participation rate More than half of those with a minimum of a high school education, 59%, use the Internet Usage of those with