The internet portal company’s shares slumped 10 per cent early on Wednesday..but those relatively minor short-term disappointments pale in comparison with the task at hand: to reverse a disturbing trend that has seen it fall steadily behind Google in the red-hot search-related advertising business.
Google’s edge over Yahoo, apparent in recent quarters in its superior growth rate in search, may have become more pronounced in the final months of last year.
Though Yahoo does not separate its revenues from search-related advertising and “branded” advertising, there were indications that net revenue growth in search may have slowed by nearly 10 percentage points in the latest quarter, compared with an estimated 45 per cent growth in the preceding three months.
The company spoke of a “balanced” performance between the two sides of its advertising business, which grew by 36 per cent overall.
To judge by Google’s stability in the markets on Wednesday – compared to the sharp drops faced by much of the tech sector – Wall Street clearly believes the slowdown has been specific to Yahoo, not the search business as a whole.
Part of the problem has been Google’s stronger presence outside the US, where search advertising is still in its infancy. Based on the so-called traffic acquisition costs it pays other websites that carry its search results, Yahoo’s international search business may have grown only about 4 per cent from the preceding quarter, compared with 13 per cent growth inside the US.
Also, Yahoo has suffered from less efficient “content matching” search technology: the adverts it displays to internet users are less likely to be relevant than those displayed by Google, leading to a “click-through rate” only half the level of its rival, according to Mark Mahaney, analyst at Citigroup.
Terry Semel, Yahoo’s chairman and chief executive, says the general perception that his company is losing ground to Google in non-US markets has been exaggerated. “When people look at international, they look at Europe, where Google is stronger than we are and we haven’t done as well,” he says.
By comparison, Yahoo is stronger in Asia, thanks in part to its minority stakes in Yahoo Japan and Alibaba in China.
However, it could take five years for the Asian search markets to grow to a size where they become a significant contributor to revenues, says Imran Khan, analyst at JPMorgan. Whereas, he adds, Google already derives around a quarter of its revenues from just three international markets – the UK, Germany and Canada.
Meanwhile, Mr Semel concedes that Yahoo has not invested as much in content matching technology – “we put more emphasis on local and video search” – but says this year will bring the investment needed in its core search platform.
Yahoo is also investing more in an attempt to outflank Google. Part of this week’s earnings disappointment stemmed from higher costs tied to the launch this month of the “Yahoo Go” brand, designed to push its portal on television sets and mobile phones.
The result: profit margins measured in terms of earnings before interest, taxes, depreciation and amortisation – the basis on which Wall Street judges the company – are forecast to slip to 42 per cent this year, from 44 per cent in the most recent quarter.
“We’re still a very high-margin company,” says Mr Semel, adding that Yahoo had not anticipated much revenue benefit from the search investments this year. “We’ll take a realistic view, maybe a conservative view.”
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