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.

[email protected]’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

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), [email protected] 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

served as a means of
bringing more e-commerce to its users. Alliances with Bank of America to
provide online banking services and Healtheon (HLTH)
for healthcare information are examples; these partners pay Yahoo! to rent
out virtual real estate on the portal’s network.

The company has also been strategic in its acquisition choices. Two
high-profile acquisitions last year were and GeoCities. provides Yahoo! with high volume traffic from its existing
multi-media hub and exclusive streaming video and audio content, which
Yahoo! can integrate into its existing properties. The deal clearly
positions Yahoo! for continued growth and dominance as the Internet enters
the broadband era. GeoCities as a branded community site provides Yahoo!
with a large base of loyal users that can be monetized through Yahoo’s
advertising and e-commerce initiatives.

Yahoo’s status as the Internet’s leading independent global media company
will continue to grow and strengthen. In its overseas expansion, it is
retaining full control of its properties — Yahoo now owns the controlling
share in 18 of the 19 localized sites. Similar to the U.S., most of these
properties rank as the premier destination in their respective regions.

Revenues for Q4:99 were $201 million, and YHOO experienced annualized
revenue of about $600 million. . .up 125 percent sequentially. The company has
an operating margin close to 35 percent and it is apparent that Yahoo’s
valuable real estate will take this margin to even greater heights in the
future, as long as management continues to execute on the vision that has
brought Yahoo! to its current position, and continue with acquisitions that
show the same sense of foresight. The network of information, communication
capabilities and e-commerce opportunities will continue driving Yahoo’s
traffic, revenue and profits.

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