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Media Deal to Impede Yahoo! Growth?

The buzz surrounding Yahoo! (YHOO) has sent its stock down lately, following speculation of a potential merger or strong alliance with offline media giant News Corp. (NWS). But will a traditional media match slow the sector leader down?

Investors drove the stock down $3-1/4 to $161-15/16 on Feb. 28, after catching wind of a possible deal. Clearly, there is concern that any significant relationship with a traditional, slow-growth media player could hinder Yahoo!'s spectacular 125 percent year-over-year revenue growth rate. Though the buzz has died down in recent days, and Yahoo! has recovered to $176, the question over the impact of a potential deal can be understood by breaking down Yahoo's business model and progress to date.

Reporter@Large's take: Yahoo! has the critical mass and velocity necessary to establish strong partnerships with offline and online media properties. This has been their approach to date, and the strategy has proven valuable in allowing Yahoo! to remain independent, sustaining its extraordinary growth rate and preserving its high-valued stock as an armory for potential acquisitions.

The company has successfully transformed itself from an online directory of Web sites to a portal/search engine to its current rank the leading independent destination on the Internet, all within the past six years. According to the most recent data from Media Metrix, 64.8 percent of all Web users visited Yahoo! properties during the month of January. The Web's second leading independent online property, Lycos (LCOS), reached 46 percent of total Web users in that same time period. The difference can also be stressed by looking at the raw numbers: Yahoo! played host to 44.3 million users and Lycos attracted 31.4 million.

By dividing Yahoo's market cap by its total number of users ($96 billion/44.3 million users), Reporter@Large finds that each Yahoo! user has a market value of $2,167. Among other reasons, Yahoo! has attained a substantial premium because of its ability to capture a large loyal audience and distance itself (with regard to total number of users) from its competitors. In comparison, Lycos users are valued at a mere $261 ($8.2 billion market cap/31.4 million users).

Yahoo's 12.9 million user advantage over Lycos is valued at roughly $28 billion (12.9 million x $2,167). That is more than three times the current market value of Lycos. In addition, these users will become more valuable as Yahoo!'s community network effect takes hold and as the percentage growth of new online users in the U.S. continues to slow.

In 1996, Yahoo!, Excite, Infoseek and CNET were in a dead heat with regards to users and page views, and then it declared "content is king" and executed accordingly to become a media giant. The other companies split the focus between content and licensing out in-house technology and other assets. This decision serves as an example of Yahoo!'s business focus and management execution as the primary characteristics which have carried it to the top of the site rankings.

The transformation from a portal to a destination occurred because management realized the importance of: 1) "owning the user," 2) encouraging users to stay for longer periods of time, 3) getting these users to come back often and 4) capturing marketing knowledge about these users (demographics, surfing patterns and shopping preferences, etc.). Yahoo! has also been able to "monetize" its traffic through advertising, sponsorships, e-commerce offerings and strategic acquisitions.

Strategic partnerships and acquisitions have also