Contact: Scott Denne
Yahoo’s leadership still doesn’t understand the business that the company is in. Overshadowed by the news – not really news at this point – that Yahoo’s core business is for sale, Tuesday’s earnings call showed that management believes it can grow a position at the center of people’s digital lives. Yahoo’s new strategic plan (and its old one as well) is to invest in mobile, social and video. Instead of navigating these trends, Yahoo has tried to lead them with heavy investments in product development at the expense of its core business. Yahoo is not a hub of ‘discovery’ in people’s digital lives, as its CEO envisions it – it is a media business and should be run as a media business.
CEO Marissa Mayer isn’t responsible for bringing this magical thinking to Yahoo. The board’s decision to hire an executive whose most significant experience came in managing product development betrayed their thinking that new offerings were the solution to Yahoo’s predicament. True to that belief, the company has launched a lot of new products and made a big bet on social with the $1.1bn reach for Tumblr, which fell short of its revenue targets and is being mostly written down. The introduction of native advertising that melds display with search (Yahoo Gemini) has been more successful. Unfortunately, new products were a solution to the wrong problem.
Yahoo’s legacy banner ad and search revenue plummeted in the past few years, close to $500m annually. Overall, Yahoo’s revenue stands right where it did in 2012, just shy of $5bn, with operating expenses at a similar level. Mayer treats the decline of legacy revenue as an unavoidable fate, saying in the earnings call that Yahoo’s choice was to cut the business entirely or ‘weather’ the slow decline. Had the board installed a CEO with turnaround experience, display wouldn’t have been written off as a forgone conclusion.
Display advertising, particularly the direct-sold banner ads that Yahoo specializes in, isn’t a major growth business. Yet it doesn’t need to evaporate. A few well-timed acquisitions of programmatic buying and selling platforms could position Yahoo for growth in programmatic display. It’s not an unthinkable strategy: a series of such deals enabled AOL to parlay its display-ad-dependent business into a $4.4bn sale to Verizon last year. Yahoo smartly picked up video ad network BrightRoll at the end of 2015 (an asset that contributed most of its revenue growth last year), though such a transaction should have been done earlier and before the company had invested in developing a media buying platform in-house as that offering became immediately redundant.
Aside from an awareness of the need to trim costs, Yahoo’s new strategic plan isn’t that different from its old one. Most disturbing is its plan to invest in mobile search. Even if Yahoo were able to gain ground on Google – an unlikely prospect – it’s extremely uncertain how consumers will ultimately use mobile search as that space continues to evolve. And however it evolves, Apple and Google, with their ability to control the mobile OS, are clearly in the pole position.
Rather than running the business they wish they had, Yahoo’s leadership should run the business they have. And that means maximizing media revenue and building up the company’s cash (it’s about $1bn poorer than it was three years ago) so it can strategically acquire its way into industry shifts, rather than spending to create them.
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