Waiting for Yahoo!: Will the Internet Leader Meet High Expectations?

This article courtesy of ChannelSeven.com

I remember when I first heard about Yahoo! It was 1995, and a party was raging at the home of a friend of mine, Mark, who worked for Compaq. The revelry had moved out to the front yard of the house, which was conveniently located next to a piercing salon and tattoo parlor. While partygoers — in varied states of intoxication — selected designs and decided whether to go through with their body ornamentation dreams, I chatted with Mark about the Internet.

“Well,” he told me, “you can just go to Yahoo! and. . .”

“What?” I interrupted.

“You go to Yahoo! and look it up. It’s the place to find anything on the Internet,” Mark explained.

I recall having to drop Mark an e-mail to ask him to remind me of the URL, an action that seems laughable now that Yahoo! is such a household name. I had no idea then, of course, of the forces that would make the company so central five years later.

This afternoon, after the market closes, the company that has become the bellwether for advertising-supported Internet plays, announces third quarter results. Meanwhile, the whole Internet advertising industry holds its breath. After all, if Yahoo!, with its 156-million-strong audience and well-respected management team, isn’t doing well, how will lesser publishers fare? If Yahoo! disappoints, shares of every public Internet company that relies heavily on ad dollars are likely to sink. And, whether the industry likes it or not, share prices are the most visible indicator of the success of online advertising. If online advertising doesn’t appear to be a successful venture, will the expected saviors of the business — traditional advertisers — come to the rescue? A lot is riding on Yahoo!

It doesn’t take much to disappoint Wall Street in the current market environment, when Apple, Intel, and Dell are warning about third quarter earnings. And there’s an especially high bar before Yahoo!, since the company traditionally beats analysts’ expectations. Funny, isn’t it — that little dance between public companies and Wall Street. The company basically tells analysts’ what to expect, then tries to come in better than that. If all goes as Wall Street expects, the company should bring in around $280 million in revenue, or 12 cents a share excluding amortization, goodwill, payroll taxes, etc. That would be up 14 percent from the quarter before. Not bad, but it’s not the 18 percent growth rate that we saw in the second quarter.

In the last few weeks, the stock has dropped precipitously, falling below $100 for the first time in nearly a year. Every day seems to bring a new 52-week-low, with the company down to $75.313 on Monday. To what is this uncertainty attributed? Softness in the online advertising market. With around 80 percent of the company’s revenues reportedly coming from advertising, it’s no surprise. The entire industry is suffering from the same malaise that’s plaguing Yahoo!. Revved-up revenue growth was expected, and the industry is failing to deliver. Things are still growing, yes, but not as quickly as expected.

There’s no denying that times are tough. When the Internet Advertising Bureau came out with its latest report, for the second quarter of 2000, many took the $2 billion quarter (8.8 percent bigger than the quarter preceding it) to be a reassuring sign. In the blind rush to don rose-colored glasses, people seemed to forget that the now well-known problems didn’t start to appear until the third quarter — a time period for which we have no IAB statistics. Sure, the dot-coms’ stock sunk back in April, but the ripple effect didn’t hit the likes of Avenue A, Mediaplex, Promotions.com, and TheStreet.com until the third quarter, and news of their missed expectations has only recently emerged.

Yahoo!, as the industry leader, is paving the way for the rest. First step, of course, has been build

ing pageviews. The company has been aggressively making moves — adding things like a bill paying service, multimedia capabilities, e-mail discussion groups, and wireless content — to make it possible for users to live their entire online lives without ever leaving its pages. U.S. pageviews aren’t everything, though. The audience here isn’t growing at nearly the rate that it once was, so the company needs to increase the percentage of its revenues that come in from abroad. Most importantly, Yahoo! needs to be the leader in cultivating traditional advertisers. It’s already lined up high-profile deals with Pepsi-Co, Visa, the NFL, 7-Eleven, and Kmart. Once these bricks-and-mortar companies jump onto the online advertising bandwagon, their prodigious marketing budgets will spill over into the rest of the industry. Still, these alliances haven’t been enough to assuage the concerns of investors.

Has the company has seized upon these opportunities quickly enough? And are international and traditional advertisers ready to step up and take their expected place in the annals of online advertising? That’s what the whole industry is waiting to find out.

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