Is Yahoo! Having An Identity Crisis?

In his self-described “coming out party”, Yahoo! CEO Terry Semel articulated his long-awaited plans for the company. However, Semel’s intent of decreasing Yahoo’s reliance on online advertising runs contrary to the nature of media, and his plight may ultimately serve only to shift focus away from the core business.

Since hitting a bottom of $8 a share in the weeks proceeding the September 11 terrorist attacks, Yahoo!’s share price has rallied on the increasingly optimistic assessment of the company. And many of those behind the soaring share price sought justification and reassurance this morning when Semel outlined his view of the future.

Of all the strategies discussed in the briefing perhaps the most pertinent was the goal to achieve a 50-50 split in total revenue between advertising and other services within three years.

Whilst resonating with Wall Street at this point in time, these words will hurt the company in years to come. There is no doubt that investors are uncomfortable with the nascent online advertising industry, but at the same time there is no point in being a media company who thinks it’s not.

True, Semel did say in the briefing that “there’s nothing wrong with advertising revenue,” however the numbers speak louder than words. To date, Yahoo!’s scattershot approach to subscription services has been driven more by the need to appease Wall Street bankers than by commercial opportunity. That may sound harsh, but the opportunity for reselling magazine subscriptions, financial reports and other such content is quite frankly nothing in comparison to the returns online advertising will offer.

It is also hard to imagine how the company will achieve a 50-50 split in three years considering that one of the key growth drivers — paid listings — is a form of online advertising and forecast to go from scratch to an expected $100 million business in a matter of years. Eliminating the process of creative classification, either subscription revenue will have to astronomically increase or its online advertising revenues will have to fall off a cliff.

The other new market Yahoo! intends to gain a foothold in is access, citing its recent agreement with SBC to offer co-branded DSL Internet access as an example of what is to come. However it’s difficult to forget the similar pacts it signed in 1998 with MCI and AT&T’s WorldNet ISP and the lukewarm success of both.

Between the two, clearly the paid listings business — keeping in mind Overture (formerly as a precedent — presents the most convincing growth option. (Yahoo! is currently partnering with Overture for these paid listings, but has said it will develop its own in-house solution.)

The underlying point in all of this discussion is that Yahoo! is one of the great online media companies, and it never should be ashamed of the economics that support a business of that nature. Whilst discussion of, and experimentation with, subscription services is garnering vast attention, Yahoo! *should* be making 80 percent of its revenues through online advertising. In the case that it doesn’t, it is simply focussing its attention in the wrong areas.

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