Time for Old Media Approach to Yahoo?

Though Yahoo is far from fading away, last week's developments concerning the portal call for new — or old, depending on one's perspective — thinking from all sides of the online advertising equation, according to industry experts.

Yahoo needs to operate more like a traditional advertising company and develop alternative revenue sources to banner advertising, such as paid premium content and services. And marketers need to stop treating portals as launchpads, they said.

Following its announcement that it would make less money in the first quarter than previously thought and that it was searching for a new CEO to replace Tim Koogle, the consensus is that Yahoo and other portals must cultivate relationships rather than expect the industry to beat a path to their doors because of who they are.

“When Yahoo started, they operated like a traditional media company,” said Jim Meskauskas, chief Internet strategist at Mediasmith Inc., an interactive media agency. “But in the midst of the dot-com intoxication they forgot all about that. They said, 'We're Yahoo. Give us your money.' “

Meskauskas said that kind of attitude would not go far these days, particularly for dot-com companies.

“It's about cultivating relationships,” he said. “It's about talking to people and being nice.”

Holly Becker, an analyst at Lehman Brothers Inc., said Yahoo should benefit from a new leader but also must radically change its culture.

“We believe that a fresh perspective will be beneficial for Yahoo, as the company has thus far shown little flexibility in adapting its business model to the changing environment,” she said. “We believe that Yahoo's Internet culture has held it back from realizing its full potential.”

A fresh perspective is apparently in order for marketers as well.

According to a recent study by consulting firm Booz-Allen & Hamilton, marketers should begin treating portals as brand development venues and should pay them for the total number of impressions they deliver, as opposed to the pay-for-performance deals that have become so prevalent online. This is based on the study's finding that Internet users view portals as destinations rather than as launchpads to the Web.

Most Internet ad campaigns are still built on the theory that portals are gateways, said Horacio Rozanski, vice president at Booz-Allen & Hamilton and a co-author of the study.

“Marketers must start thinking of portals in the same way they think of mass-circulation magazines and television networks, as major centers of commerce and content that draw huge audiences,” Rozanski said.

The study found that while 60 percent of Internet users visit portals, only 0.1 percent click on banner ads. Yahoo gets about 90 percent of its revenue from banners, the study said.

Since banners accounted for only half of all Internet advertising in the second quarter of 2000, the study suggests that advertisers switch to co-sponsorships with portals. The study found that many portal operators still cling to an outdated revenue model that relies on advertising payments based on click-through rates, which fell more than 40 percent from October 1999 to October 2000.

While Yahoo has been the business model that all portals aspire to re-create, its recent announcement proves it is not immune to the economic downturn affecting its competition, as many thought.

Yahoo, Santa Clara, CA, issued a profit warning last week noting that it expects its revenue for the first quarter of 2001 to be $170 million to $180 million, with break-even earnings per share. The company previously estimated earnings per share of 4 cents to 7 cents on revenue of $220 million to $240 million. For the full year 2001, it expects to post earnings per share of 33 cents to 43 cents on revenue of $1.2 billion to $1.3 billion.

Steve Weinstein, an analyst at Pacific Crest Securities, said Yahoo's first-quarter ad revenue alone is expected to be down 9 percent at $191 million.

However, Weinstein noted that Yahoo's business services revenue in the first quarter is expected to be $33.8 million, a 58 percent increase from the first quarter of 2000. For the full year 2001, business service revenue is forecast at $198 million, an increase of 87 percent from 2000.

Yahoo noted in a conference call with analysts last week that its business segment was on track for a healthy quarter.

“Our Corporate Yahoo business is developing according to plan,” said Susan Decker, the company's chief financial officer.

Other portals have faced a hard road lately. The Walt Disney Co. on Jan. 29 said it was closing its Go.com portal, resulting in the layoffs of 400 workers. [email protected] announced that it would lay off 250 workers and write off $4.8 billion, largely related to the decline in value of its Excite portal. And NBCi, the portal affiliated with General Electric's NBC network, recently announced layoffs that would leave it with 350 employees, down from 850 a year ago.

“Yahoo is facing a difficult macro environment not just relegated to the online world,” said Frederick Moran, an analyst at Jefferies & Co. Inc. “However, when an Internet bellwether like Yahoo is experiencing difficulties, we believe lesser companies are even more susceptible.”

For months, critics have said portals such as Yahoo and Microsoft Corp.'s MSN must overhaul their revenue models in order to depend less on banner ads. But most industry observers agree Yahoo is in no danger of disappearing anytime soon.

“Yahoo, whether you like them or not, will make it,” Meskauskas said. “They're too big not to. No one ever got fired for buying Yahoo.”

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