Yahoo's slippery ads dip

Yahoo's fourth-quarter earnings were nothing flash, and new chief Marissa Mayer has a steep mountain to climb if her company is to stop haemorrhaging display revenue.

All eyes were on Sunnyvale on Monday as Yahoo released its first set of earnings figures with Marissa Mayer as chief executive for the entire quarter. The ex-Google executive has everyone wondering – what is Yahoo! in 2013 and what moves is it going to make to stay competitive?

The earnings call didn’t provide much insight – nor was it ever going to. Mayer has barely been in the role six months and has used most of that time to audit current operations. Really, Yahoo’s fourth-quarter earnings were not about her strength as a leader, but more about the position Yahoo finds itself in and the core issues she needs to address.

Right now, the challenge for Mayer is to address the slowdown in advertising sales growth. Overall, Yahoo! revenue for the fourth quarter was up year on year – 4 per cent. However, this growth came from an increase in search revenue and a 10 per cent uplift in ‘other’. The main part of Yahoo’s revenue comes from display advertising and this was down 5 per cent year on year to $520 million, the second consecutive fourth quarter where display revenues have dipped.

Display revenue is the first and most crucial challenge for Mayer. Over the last three years display revenue has gone backwards. Fourth quarter 2012 was $520 million. For the same period in 2011 it was $546 million. The fourth quarter of 2010 saw display revenues of $635 million and the fourth quarter of 2009 saw revenue of $560 million from display advertising. There’s no other way of looking at it – Yahoo’s display revenues are going backwards, despite the fact online advertising spend increases are still predicted to be in the double digits per year by most of the large advertising holding companies.

The display predicament Yahoo finds itself in is not dissimilar to two of its listed counterparts – the New York Times Group and AOL. In its third quarter earnings, The New York Times reported a 2 per cent year-on-year decline in digital advertising revenues; while AOL for the same period saw a 1 per cent decrease in display advertising revenues. For content creation companies, the last two years haven’t been kind.

Yahoo’s predicament is particularly worrying for, and reflective of, the wider industry.

Yahoo has engaged users at scale, strong properties and has an advertising sales structure that has been positively received. While the portal concept may be considered by many to be redundant, Yahoo has a collection of strong assets across key categories – sport, finance, lifestyle, news, photography and mail – which in isolation are amongst the leaders in their respective categories. Even with these properties it cannot hold its display advertising position. Many publishers would happily accept Yahoo’s 4 per cent dip in display, with some mid-sized sites abroad and locally reporting 10-20 per cent dips year on year.

Compare Yahoo’s fourth quarter to Google’s fourth quarter and the results are telling. For one, Google has a monopoly on paid search, which gives it $8 billion plus per quarter of high margin revenue; however it is seeing significant growth in its advertising network revenue. These network revenues grew 19 per cent year on year for the fourth quarter of 2012 to $3.43 billion. Since the fourth quarter of 2009, Google Network revenues have increased from under $2 billion per quarter to $3.43 billion, with no signs of slowing.

Mayer’s broad strategic direction is to make Yahoo! one of the world’s daily habits with a leadership position in mobile. This is in line with current consumption trends, but mobile will ultimately face the same issues browser based display advertising does – the difficulty of holding yield and selling audiences for the higher amount than it costs to attract them. It is hard to see how improvements in Yahoo’s current product suite – however amazing – will fundamentally change the economics of advertising on the Internet and the divide that now seems to exist between the profitability and revenue increases of Google and Facebook (who will release earnings later this week, expectations are they will be up 25-30 per cent for the fourth quarter of 2012) and the flat revenues and stagnant yield that seems to be affecting everyone else. The same revenue problem that is challenging Yahoo is no doubt similar to MSN, AOL, Barry Diller’s IAC the New York Times and News Corporation.

They say ‘a problem shared is a problem halved’. With that in mind, is it time for the big content players on the Internet to look to work closer together in a real, innovative and strategic way to help solved their share problem? Whilst they battle with the realities of sluggish advertising revenue, there are two companies who are seemingly operating in another universe profits wise with no signs of slowing down.

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