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Yahoo, Now Offering Search as a Web Service
About six months ago, I heard that Yahoo was contemplating offering its entire search platform as a web service, much like Amazon’s S3 storage and EC2 computing services. Since the rumor was short on details and Yahoo was already in the midst of a gut-wrenching upheaval, I didn’t put much stock in it. Apparently I should have, for Yahoo today announced the beta version of BOSS (Build Your Own Search Service), which essentially turns its core search and other related technologies into a free web service that can be used by anyone who wants to build their own search engine.
This isn’t simply access to Yahoo’s search results; Google did that ages ago, though I wonder if anyone actually uses it. Rather BOSS will allow anyone to rank, arrange and display search results that befit their own algorithm, without as much as acknowledging that the results are coming from Yahoo.
Yahoo News Search, Image Search and Yahoo Spell Checker services will all be offered as part of this effort. Combine this with Yahoo’s recently introduced SearchMonkey tool, and you could build a search engine that is entirely your own.
Prabhakar Raghavan, chief strategist for Yahoo Search, said it typically costs around $300 million to build a search engine and its related infrastructure, which is why there are so few players. He has a point: Powerset recently sold out to Microsoft for precisely those reasons.
Raghavan hopes that BOSS could help foster a lot of experimentation around search, and more importantly, around the search experience, because startups will no longer have to spend millions on infrastructure. “The opening up of our search is a philosophical shift, and we are saying that if you can be better than us, so be it,” said Raghavan. “There is no shortage of search ideas, though the barriers were only a few hundred million dollars. You have to be willing to have your lunch eaten in order to disrupt.”
The BOSS service is being offered for free, though as part of the deal users will have to use Yahoo’s Search Advertising. Yahoo believes that by boosting query volumes, it can create more volume for its search advertising and thus begin to grow against its nemeses: Google & Microsoft.
It’s a very bold move by the hobbled online giant, as it puts its own search business at risk. “We are trying to disrupt the market by allowing people to come and build on our platform,” Raghavan admitted. Two startups, Hakia and Me.dium, have already signed on for the service.
But I think it’s a risk worth taking, for it will shake up the search status quo and offer a way in for the little guys and all their creativity. Far more importantly, however, it helps people to think of Internet search beyond the tried and tired paradigm of proactively “finding” information.
Unlimited queries, the ability to mix with other content including news, and research from universities and other such repositories could really change the game. By allowing folks to use its engines in tandem with their proprietary data (such as a proprietary social graph), Yahoo will allow them to build a different kind of user experience. “We don’t need to see proprietary data but work with them,” Raghavan said.
This isn’t a slam dunk, however. Yahoo still has some serious challenges ahead of it. The company’s hope is to show big gains in search queries and search-query related advertising revenues. Just like I hope to be the starting pitcher for the Yankees.
Yahoo executives didn’t answer my repeated questions about the potential impact on their business. Notably, they are asking startups to sign up for their search monetization system — the very same system that is going to use Google to drum up ads. That isn’t a very confidence-inspiring move. And if this monetization tool was so great, Yahoo wouldn’t be in the kind of trouble it’s in. If you’re a startup, do you want to hitch your wagon to a wanna-be ad system?
My reservations aside, this is a big, gutsy move by Yahoo to emerge from the stupor that has enveloped the company and the search industry at large. I’m looking forward to seeing the results of this experiment.
Yahoo’s Blog has more details on the new offering.
What’s Wrong With Yahoo?
Dietrich Bonhoeffer, a German writer, once noted that “if you get on the wrong train, running down the aisle in the opposite direction really doesn’t help.” HBO series The Wire co-creator Edward Burns used that quote to describe the drug culture, bankruptcy of the political establishment and eventual fall of some of the great American cities in an interview with Reason magazine. You might as well use the same words to describe Yahoo!
Over past few months, Yahoo’s destiny has become fodder for headlines and cheap shots including some by myself. What hasn’t really been discussed is the systematic rot that has set into the once proud company. What hasn’t been discussed is that the company isn’t really facing up to the fact that its layers of management have resulted in a state of masterful inactivity, masked perhaps as a culture of consensus. This starts at the top - from the company’s board and senior management down to VP level where people are prone to organizing and attending twenty meetings before deciding the fate of a project.
Some senior managers including the ones who are deserting the company are skillful players in this game of hiding ennui behind grandiose plans and a great future that never happens. Others who have been wishing upon a change had realized the hard way about the futility of it all. Look at some of the public statements by those who have left recently and you will realize that the rot is very deep seated in this company. In past few weeks that has emerged as the single issue many Yahoo employees have discussed with me.
Instead of addressing these issues - Yahoo is finding itself releasing memos to the media, writing letters and announcing yet another reorganization. They should have read the writing on the wall when the vice president exodus began two years ago. But instead, the company played executive version of musical chairs. Sort of how Rome’s rulers were busy reading tarot cards when the empire was collapsing.
Earlier today, Kara Swisher broke the news that Zimbra co-founder Scott Dietzen will become the new Senior VP of communications and community properties. Dietzen is a very capable executive, smart, adroit and understated. He is the right man of the job, and can crack some heads if needed be. But can he succeed in an environment that rewards medocrity. Can he bring about change, or will he leave frustrated (but rich) like some of the other founders such as Stewart Butterfield, co-founder of Flickr who sold their companies to Yahoo.
As part of changes announced today:
Yahoo! is making changes to its technology organization, led by Chief Technology Officer Ari Balogh, to better position the company to execute on its strategic priorities. Principal changes are developing a world-class cloud computing and storage infrastructure; rewiring Yahoo! onto common platforms; and creating a stronger partnership between product and engineering teams.
In order to expand its cloud computing capabilities, the Company will form a Cloud Computing & Data Infrastructure Group, charged with developing a computing infrastructure that balances scalability with cost effectiveness. It will move all consumer-facing platform teams to the Audience Technology Group, led by Venkat Panchapakesan. In addition, it is putting new leadership in place behind Yahoo!’s search group, naming Prabhakar Raghavan to direct search strategy and Tuoc Luong as the interim leader of the search product team. Both Prabhakar and Tuoc will also continue in their roles as the leaders of Yahoo! Research and Search Engineering respectively. In addition, David Ku will lead the Advertising Technology Group within Search.
New CTO Ari Balogh is jazzed about cloud computing and storage. He should be - Yahoo is a big champion of Hadoop, an open source effort that can be immensely disruptive in years to come. Despite that, I don’t buy the spin Yahoo’s PR department put out today. At our Structure 08 event yesterday, Yahoo had very little representation.
What’s Wrong With Yahoo?
Dietrich Bonhoeffer, a German writer, once noted that “if you get on the wrong train, running down the aisle in the opposite direction really doesn???t help.??? HBO series The Wire co-creator Edward Burns used that quote to describe the drug culture, bankruptcy of the political establishment and eventual fall of some of the great American cities in an interview with Reason magazine. You might as well use the same words to describe Yahoo!
Over past few months, Yahoo???s destiny has become fodder for headlines and cheap shots including some by myself. What hasn???t really been discussed is the systematic rot that has set into the once proud company. What hasn’t been discussed is that the company isn’t really facing up to the fact that its layers of management have resulted in a state of masterful inactivity, masked perhaps as a culture of consensus.
Some senior managers including the ones who are deserting the company are skillful players in this game of hiding ennui behind grandiose plans and a great future that never happens. Others who have been wishing upon a change had realized the hard way about the futility of it all. Look at some of the public statements by those who have left recently and you will realize that the rot is very deep seated in this company. In past few weeks that has emerged as the single issue many Yahoo employees have discussed with me.
Instead of addressing these issues - Yahoo is finding itself releasing memos to the media, writing letters and announcing yet another reorganization. They should have read the writing on the wall when the vice president exodus began two years ago. But instead, the company played executive version of musical chairs. Sort of how Rome’s rulers were busy reading tarot cards when the empire was collapsing.
Earlier today, Kara Swisher broke the news that Zimbra co-founder Scott Dietzen will become the new Senior VP of communications and community properties. Dietzen is a very capable executive, smart, adroit and understated. He is the right man of the job, and can crack some heads if needed be. But can he succeed in an environment that rewards medocrity. Can he bring about change, or will he leave frustrated (but rich) like some of the other founders such as Stewart Butterfield, co-founder of Flickr who sold their companies to Yahoo.
As part of changes announced today:
Yahoo! is making changes to its technology organization, led by Chief Technology Officer Ari Balogh, to better position the company to execute on its strategic priorities. Principal changes are developing a world-class cloud computing and storage infrastructure; rewiring Yahoo! onto common platforms; and creating a stronger partnership between product and engineering teams.
In order to expand its cloud computing capabilities, the Company will form a Cloud Computing & Data Infrastructure Group, charged with developing a computing infrastructure that balances scalability with cost effectiveness. It will move all consumer-facing platform teams to the Audience Technology Group, led by Venkat Panchapakesan. In addition, it is putting new leadership in place behind Yahoo!’s search group, naming Prabhakar Raghavan to direct search strategy and Tuoc Luong as the interim leader of the search product team. Both Prabhakar and Tuoc will also continue in their roles as the leaders of Yahoo! Research and Search Engineering respectively. In addition, David Ku will lead the Advertising Technology Group within Search.
New CTO Ari Balogh is jazzed about cloud computing and storage. He should be - Yahoo is a big champion of Hadoop, an open source effort that can be immensely disruptive in years to come. Despite that, I don’t buy the spin Yahoo’s PR department put out today. At our Structure 08 event yesterday, Yahoo had very little representation.
Microsoft, Yahoo Back On — or Not
It is a sad commentary on the state of affairs in Silicon Valley when Carl Icahn, a known corporate raider from the go-go 80s, is used as a lightening rod to bring two of technology’s major players, Yahoo and Microsoft, to the table to strike some sort of a deal. And there seems to be some sort of a transaction in the works. And that’s not necessarily a good idea.
Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. There of course can be no assurance that any transaction will result from these discussions.
As you might remember, Microsoft made a $31 a share bid for Yahoo, got spurned, and then raised the bid to $34 a share, only to see it rejected it again. At that point Microsoft walked. Many Yahoo shareholders weren’t cracking smiles when that happened, prompting Icahn to step in with his idea of a board. Ichan’s move to put a new board in isn’t all that bad: Yahoo needs to clean house, as I had said a long time before holier-than-thou Carl showed up.
The New York Times reports that there were talks that “center on a partnership or joint venture for search-related advertising” as the two companies find a way to beat Google. Kara Swisher says that Microsoft “wants most of all to grab Yahoo’s search ad business to become a credible No. 2 in the important sector.”
This is Microsoft, once proud company that would have gone to any length to win, and it is going to settle for second spot. What does it really say about Microsoft? Never mind, it is a rhetorical question.
The combination of Yahoo and Microsoft in the search business is not going to be a winning combination. Essentially Microsoft is in the market to buy eyeballs – ones that have been declining in numbers. Both Yahoo and Microsoft continue to lose market share to Google in the search market.
Just take a look at the April 2008 data for US searches from Hitwise. According to comScore data Google now outranks both Yahoo and Microsoft. So building a search-advertising business makes no sense. (Read Kevin Johnson, Microsoft’s President of Platforms & Services Division memo about Microsoft’s online effort.)
For Yahoo it might not be a bad idea, since the company doesn’t solely rely on search/search-based advertising to make money. Instead, a substantial chunk of its revenues come from (what I like to call) produced pages, email and other content related efforts. If Microsoft wants to pay up for that, that I guess is palatable defeat for Yang & Co.
I Don’t Want Source Code; I Want App Tone
For a long time, source code was viewed as a software company’s crown jewels, protected by dongles and complex encryption schemes to prevent copying and theft. In the software-as-a-service world, however, source code becomes irrelevant. If someone offered us the schematics to a telephone, we wouldn’t care. We don’t want to know how to make a phone. We want a dial tone. When it comes to IT, we want app tone.
A recent April Fool’s joke claimed the Vista source code was leaked. But really, would we care? Gartner says Windows is collapsing under the weight of 20 years’ worth of legacy code. Forrester says that only 6.3 percent of enterprise users it surveyed at the end of 2007 had switched to Vista. It’s not just Microsoft. IT administrators will tell you that the cost of running any application far exceeds its license fees.
Even the open-source movement is feeling the change: Recent modifications to the third revision of the GNU Public License recognize that it’s the service, not the source code, that has value — and that any user of the service has the rights to its source code. IP-protection firm Palamida’s GPLv3 blog says that “in a SaaS arrangement…the opportunity to receive such source code must be prominently offered to all users who interact with the program remotely over a computer network.” (italics ours)
But I increasingly don’t care. If 37 Signals gave me the Basecamp source code for free, I’d still use their service. If Freshbooks burned me a copy of their app, I’d still subscribe to them. Even if Salesforce.com handed me their software, I’d use their hosted portal.
In the license world, it’s all about the ability to make copies of the software. By contrast, in the world of app tone, it’s about the ability to run instances of the code. It’s about operating an application reliably, and the ecosystem the SaaS provider can build around it through APIs, partners and extensions such as the Salesforce for Google Apps integration.
Microsoft clearly wants Yahoo for its traffic. The future of consumer applications is free, and having traffic to monetize those applications in other ways is essential if Microsoft is to make the jump from software to service.
But the ability to deliver “app tone” is an equally compelling reason for Microsoft to go after Yahoo. Instead of selling software burdened with 20 years of backwards compatibility, they need to start running applications. Yahoo is not only staffed with people experienced at this, but it has a large-scale computing cluster to run it on, and an installed base that already thinks of it as a service. It’s something that Redmond desperately needs, and something Yahoo’s willing to ally with its biggest competitor to defend.
Two Tech Events, Two Different Worlds
This Friday marks the beginning of South by Southwest in Austin, starting with the Interactive Festival. Every year, geeks galore descend on my hometown, only to be replaced by filmmakers and then musicians. The geeks are my favorites, but you knew I’d say that.
As a reporter I look forward to the event, and as a resident I bemoan the lack of parking downtown, the full restaurants and the deluge of hipsters alternately making plans to move here or dissing the place for its provincialism. This year’s interactive lineup has an impressive array of companies who have built their business on the web, from Yahoo and Google to startups such as Facebook and MOG.
And 1,700 miles away in the colder climate of Philadelphia, about 1,200 network engineers will gather to perform the less-celebrated task of making sure the Internet keeps humming along. The Internet Engineering Task Force is holding one of its thrice-annual meetings to talk about the transition to IPv6, the problem of building faster routers when there’s ever more routing information to take into consideration, and a host of other issues relating to the core of the Internet.
Listening to Jari Arkko, an area director for the IETF, talk about the goals at this IETF meeting, it struck me how much the Internet has changed technology. I’m very much a hardware geek, in love with data center infrastructure, networking and chips, so I am now amazed at what a technology company can do without this level of engineering.
In the early days of the Internet, many of these technology firms had to at least figure out their data center architectures and how they would deliver and support their online shopping sites or web auction houses. But thanks to hosted services, that’s less important today. You no longer have to be a techie to start a technology company.
This is great for the billions of people using the Internet to access services and content, and speaks to the maturity of the web. However, it’s important to give credit where credit is due. So while the technology companies attending SXSW are slamming down the drinks and hobnobbing with the digerati, let’s take a moment to toast the engineers who make it all possible. And for those network engineers in Philly, it’s Beer Week up there next week, so sneak out of those plenary sessions and toss one back. Hack into my online bank account, and it’s on me.
Is Yahoo Really Worth More Than What Microsoft Offered?
Yahoo’s stock had been declining steadily for almost two years before Microsoft showed up with Mad Money, yet the Internet portal thinks it’s worth $40 a share. Fact, or a case of corporate delusion? I think it’s the latter. Why is it worth $40 a share? (Is it because Microsoft offered $40 a share for Yahoo earlier, and Yahoo never took the offer and now are banging their head against the wall?)
Last time Yahoo traded at over $40 a share was back in January 2006. Now I am not against the idea of Yahoo squeezing more money out of Microsoft, as long as Yahoo can make a good case for it. Still, a 60 percent premium isn’t enough for Yahoo’s investors such as Bill Miller of Legg Mason, a mutual fund company. In a letter to investors in his fund, he writes:
Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004. YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.
I would love to see Miller’s valuation work on Yahoo. Call me cynical, but there is a reason the stock is trading at a four-year low. Of course, this is the same fund that has big positions in stellar performers like Countrywide Financial, eBay and Sprint Nextel.
Many Wall Street analysts think Yahoo is worth between $34 and $35 a share. And that is the best case scenario, and assumes that everything will go right for the company in the display advertising business. Gee, I wonder why Google is spending over $3.1 billion trying to buy DoubleClick?
I think Yahoo is suffering from a case of corporate delusion. The company’s litany of woes is so long that it’s going to take some time before the proverbial sun will shine on Yahoo’s cow patch in Sunnyvale again. People seem to have already forgotten some of the problems that showed up in the fourth quarter of 2007 (not that they’ve been resolved), such as:
- Yahoo’s search revenues slowed down after growing for four straight quarters.
- Yahoo used to get paid by the broadband providers, but now it will have to pay them a piece of the advertising action. That will result in between $150 million and $200 million in lost fees in 2008. This was presented as a positive, but getting paid isn’t the same as paying. (AT&T and BT are offering between $300 million and $400 million as upfront payments, while Rogers will pay $50 million.)
And look at yesterday’s layoffs. After sending out an email thanking the troops for sticking by the company, Jerry & Co. cut about 1,000 jobs. Nice morale-boosting move. Memo to Yahoos: Jerry-atrics are as likely to shank you as the Barons of Redmond.
There will be some of you who might accuse me of being too hard on Yahoo, and perhaps I am. But it is hard to have empathy for a company that has consistently managed to underperform. It has been losing the talent that made it great. More importantly, there seem to be very few reasons to catalyze growth and a better future at Yahoo.
And if Microsoft wants to pay a 60 percent premium for this kind of a future, that’s a pretty good deal.
By the way, if you want to catch up with the roller coaster of the Yahoo-Microsoft showdown, Kara Swisher has a nice wrap-up today, while Michael Arrington is reporting of talks between Yahoo and News Corp.
Dear Yahoo, I Pwn You. XO Microsoft.
Just when you’d think Google’s financial discombobulation would give Yahoo some rest comes this heartfelt bullet from Microsoft. On the PR newswire this morning runs this incredibly respectful yet dispiritingly asexual love letter from Steve Ballmer to Jerry Yang. And, oh how Mr. Ballmer loves to dish, to wit:
In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that ‘now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.’ According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the ‘potential upside’ if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.
Man, you have to hand it to sweaty old “Give It Up to Me!!!” Ballmer.
He corralled Yahoo’s proscribed empire into his greasy fist while preserving that silly artifice of the exclamation point in Yahoo!’s name. Nicely done, Steve. More than that, he finally called Yahoo on the Oz-like illusion it’s been fostering for a couple of years: “You had a year. You lost. All your base belong to us.”
I can’t shake this feeling Ray Ozzie has a hand in all this, but oh well. Yahoo shares finished Thursday at $19.18, but Ballmer & Co.’s bid of $31 a share for the web portal turned…umm, Microsoft property has driven the stock up 50 percent to $28.68 Friday morning.
Microsoft, which has $37.8 billion in cash and short-term investments, was to put out $44.6 billion in cash and stock to buy an Internet pioneer that until a year or so ago was so revered by investors and affiliates that everyone would have laughed aloud at the idea of the ticker MSFT swallowing YHOO.
Now it’s February 2008, and is anyone laughing?…Ben Stein…Beuller…anyone??
Having spent my share of last-calls at bars, I can only applaud Microsoft’s ambition in its 3 a.m. bid at corporate copulation — while snickering privately at the 62 percent premium over what everyone else thought Yahoo was worth until this deal was proffered.
Let’s sit down a minute and think about what a Microsoft-owned Yahoo will mean.
Yahoo has been admirably laissez-faire with Flickr and del.icio.us. Will they be preserved or folded into to services we’ve all eschewed? How will Yahoo mail accounts be reconciled with Hotmail accounts? Will those of us who use Yahoo Finance and all its features adapt to MSN Finance? What is MSN Finance?
A 62 percent premium, hmmm –- we Yahoo users have a new choice: Learn to love life under Ballmer, or migrate to Google.
Yahoo, Please Put Up A Fight
Written by Sramana Mitra
Yahoo has lost about $20 billion in market cap over the last two years. The fight that it was supposed to put up against Google has been full of Brownian Motion, generating no real momentum.
Yahoo has a staggering 500 million users. However, it does a rather poor job of monetization. The vision that Yang shared at CES last week (“At Yahoo we want to be the most essential starting point for your life”) can come true if the key activities that we perform online are channeled through its My Yahoo service. And on the financial side, each of those activities needs to be backed up by a monetization model that takes full advantage of the traffic that Yahoo consistently manages to generate and preserve.
I have written endlessly about Yahoo’s turnaround strategy, making no bones about the fact that I believe Yahoo is in THE most promising position to be able to leverage Web 3.0.
And yet, Yahoo continues to falter.
The company will report its fourth-quarter and full-year 2007 results next week. It is a fantastic leveraging opportunity — if they can play their hand right.
The reason I believe that Yahoo can become the jewel of Web 3.0 is that it already has strong or interesting positions in multiple verticals, among them news, sports, finance, jobs and photo sharing. My entire Web 3.0 thesis is based on the web becoming verticalized, and therefore, to do justice to its potential, Yahoo needs to win in the verticals, and monetize them.
Let’s take the example of the online jobs vertical. The market has continued to grow rapidly; online recruitment advertising ($5.9 billion) surpassed newspaper job ads ($5.4 billion) in 2006, according to media research firm Borrell Associates. Newspapers are losing vertical classifieds to online, and Yahoo should be one of the most prominent beneficiaries of this movement.
But it isn’t, at least not yet. Why not?
Yahoo bought HotJobs, thwarting Monster’s effort to consolidate the space. Today, jobs is one of the top online segments and constitutes around 25 percent of U.S. Internet ad revenues. The top players in the online jobs market are CareerBuilder, Monster, Yahoo HotJobs and vertical search engines like Indeed and SimplyHired. HotJobs has approximately 9 percent of today’s market.
Monster, meanwhile, is an independent public company with a market cap of $3.5 billion and revenue of $997 million for the nine months ended Sept. 30, 2007; Rupert Murdoch is rumored to be mulling an acquisition of it. Monster had 60 percent market share in 2001, but fell to roughly 30 percent in 2007. Still, put HotJobs and Monster together, and Yahoo would have close to 40 percent market share in this important vertical.
Yahoo should also dominate online photo sharing; in the U.S. the top 10 photo-sharing sites draw around 50 million visitors each month. Monetization happens primarily through hosting fees and photo printing/merchandising services. Flickr, a wonderful property that Yahoo already owns, has figured out the hosting bit, but its monetization strategy does not include an in-house printing/photo merchandising service. To close this gap, Yahoo should buy publicly traded Shutterfly, which expects to post revenue of $180 million for the full-year 2007 period but whose market cap has recently dropped to under $500 million.
Yahoo has also made a move in online travel, but is not a top performer. Priceline, Expedia and Orbitz are all monetizing the segment. Yahoo should acquire one of them, and become a serious player.
Yet another segment that is moving online is real estate classifieds. Borell Associates predicts that by 2012, newspaper real estate ad revenue will hit $3.2 billion, while online real estate ad revenue will surpass that at $3.4 billion. In 2007, total ad spending on real estate dropped 3 percent, but online advertising soared 25.8 percent to $2.6 billion due to a shift to online from print. Yahoo doesn’t have much of a presence in online real estate — ZipRealty is a ripe and cheap acquisition target.
On the positive side, Yahoo is No. 1 in news, sports and finance. However, in each case, the monetization needs to be much more thorough.
What I’m suggesting is that Yahoo build up and/or acquire multiple strong online verticals, monetize them thoroughly, report on them separately, and create an organization structure that enables them to execute on them successfully.
Their current organization structure, which has advertisers, publishers and audiences under different executives, is in my opinion a flawed model. Accountability is unclear. They should put each vertical – soup-to-nuts – under a separate GM, one who is accountable for all three aspects of the vertical and owns the P&L. This would fix a lot of the cultural problems and finger-pointing for which Yahoo has lately become infamous.
I am still a great believer in Yahoo’s potential. The monetization path is rather clear to me. It should be equally clear to Maggie Wilderotter, Yahoo’s recently recruited board member, who also sits on the board of newspaper conglomerate McClatchy, and has articulated the vertical classifieds situation rather clearly to me.
When will it become clear to Jerry Yang and Sue Decker?
Yahoo’s China Syndrome: Alibaba IPO Lifts YHOO
Maybe one of the smarter moves of the Terry Semel era was for Yahoo to give up on its China operations, settling instead for a substantial chunk of a native startup, Alibaba. That decision has powered Yahoo’s stock to a level that was barely imaginable a month ago - and it may send it even higher.
Yahoo’s shares suddenly surged Friday afternoon to its highest level in 20 months on news that everyone has known for some time: It own’s a 40% stake in Chinese e-commerce giant Alibaba, and Alibaba is going public in Hong Kong with a valuation of at least $8.8 billion.
Back in August 2005, Yahoo paid $1 billion in cash for the stake and threw in its own Yahoo China operations, which were then reportedly valued at $700 million. About a year later, then-CFO and current President Sue Decker valued the Alibaba investment at $1.4 billion. Today, a 39 percent stake in a company valued at $8.8 billion is worth $3.4 billion, or a 150 percent return in one year.
So what set Yahoo on fire right before the end of trading last week? Someone ran the numbers and estimated how much an Alibaba IPO would add to Yahoo’s stock. The answer, as reckoned by American Technology analyst Rob Sanderson, is an increase of $2.50 per Yahoo share.
That’s not all. Sanderson figures the Alibaba stake is worth about $6 a share to Yahoo, and it could rise to $13 or $15 a share in a few years. He said Alibaba properties Taobao, which has out-eBayed eBay in China, and AliPay, a PayPal-like service, are where eBay and PayPal were several years ago.
Yahoo’s stock rose $2.29 at $33.63 in Friday trading and is up another 40 cents at $34.02 in aftermarket trading as of Sunday night. Sanderson’s target for the stock is even higher: $41 a share. Less than a month ago, Yahoo was trading as low as $22.27, an it’s already risen 53% in that short time.
A week ago, Alibaba raised its offering price from a range between $10 and $12 a share to a range between $12 and $13.50 a share. According to Reuters, the offering was well oversubscribed, attracting $180 billion in orders from institutional investors. Throw in retail demand and the stock was oversubscribed 180 times over. Given that demand, the stock is quite likely to surge once it starts trading, even if the offering price is raised yet again.
So a move made two years ago under Semel is now helping Yahoo after he’s gone. But don’t give Semel too much credit. After all, it was clear at the time that the deal’s key broker was Jerry Yang, who has since succeeded Semel as CEO. Now Yang has arranged for Yahoo to buy 10 percent of the shares that Alibaba is selling in the offering.
Update: That didn’t last long. Yahoo’s stock is now trading back down at $31.77, lower than at any point on Friday. There are believers still jumping on the Alibaba bandwagon. Justin Post at Merrill issued a note echoing Sanderson’s thinking only with at $36 target, and a Seeking Alpha contributor sees the stock at $50. Bears may be thinking other uncertainties outweigh any China-driven gains, so we’ll see.
Did Microsoft go lose its head over aQuantive?
I’ve been trying to find a way to illustrate just how screwy Microsoft’s $6 billion bid for aQuantive is, and here it is: For $6 billion in cash, Microsoft could have hired, in a single day, 60,000 engineers and salespeople (plus managers to make sure they earn their pay) - paying each one of them a $100,000 salary.
Of course, if Microsoft did that in one day everyone would think its executives had gone mad. After all, it already employs a modest 71,000 people around the world. Instead, it’s paying out $2.85 million for each of the 2,106 employees who work for aQuantive. Which, no matter how hard as people labor to rationalize this deal, is at the very least slightly more mad than that, if not good old-fashioned American bat-shit insanity.
Just as Microsoft was obsessed 10 years ago with an iron grip on the computer desktop - a vision that proved almost fatally shortsighted - it’s now obsessed with having a Bigfoot-sized imprint in the online-advertising industry.
Sure, being shut out by Google and to a lesser extent Yahoo has to be painful today, but the fact is Microsoft is seeding several markets that may well be just as important if not more important in a few years on: video games, online business transactions, health-care software and consumer-oriented robotics.
Still, Microsoft blunders on into online ads like a middle-aged ex-quarterback bent on reliving those glory days of high school. In the world of M&A, as in a post-midnight dive bar, desperation is a cheap cologne. If anyone smells it on you, they hold it against you. After Friday’s news, Microsoft is fairly doused in eau de désespoir.
Yet as always happens whenever something occurs that makes no sense whatsoever, there is no shortage of explanations: Microsoft lost Yahoo, so this is its last best option in online advertising. No wait, this allows Microsoft to get back into the courting dance with Yahoo. Or just maybe, Microsoft knows a bargain when it sees it.
The thing is, aQuantive is a respectable enough, if already overpriced, company. But its value has been erratic. Before the whole media-merger mania caught fire, aQuantive went from $11 two years ago to $29 in early 2005, down to $19 that same summer, and back up to $29 a few months on.
So aQuantive as an investment is kind of like John Travolta’s career: It really all depends on when you catch him. Are you getting the epoch-defining Saturday Night Fever or its unpalatable sequel Staying Alive? Pulp Fiction or Michael?
Just Microsoft’s luck, Travolta is about to headline the new Hairspray in drag. Microsoft wants a bride who resembles Doubleclick, snatched away by Google earlier this spring, but aQuantive has been dabbling all along in, shall we say, alternative revenue streams: “behavioral targeting businesses” and “creative development and branding,” and whatever those euphemisms, taken from aQuantive’s last 10-K, might suggest.
Microsoft has often been compared with Google unfavorably in recent years. One thing both companies shared in common was their restraint in spending hard-won capital. But with Google’s $3 billion buy of Doubleclick and now Microsoft’s buy of aQuantive that’s twice as large, I fear we are in uncharted territory of M&A-Land.
Well, territory that hasn’t been charted since the hyper-aQuisitive days of the dot-com years. But who would rationally choose to return to those silly times?
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Mashup litmus test for Web 2.0 start-ups
Social music darling Last.fm announced this week that they are going to start a video service any minute now. Some folks apparently couldn’t wait and just developed their own mashups in the mean time.
Take Lasttube for example. It’s a great web-based video player combining Last.fm and Youtube, glued together with Yahoo Pipes and Adobe Flex 2. It’s been whipped up by one lone programmer in Colombia of all places, who by his own account only needed one day to complete this project, including coding, testing, googling and lunch time.”
If mashup programmers can do stuff like this in no time – what does that mean for start-ups like Last.fm? For one thing, they really have to try harder.
Lasttube isn’t the only mashup that combines Last.fm and Youtube. Last.tv compiles a video playlist based on your or someone else’s music profile in a dedicated web player, and Tim Bormans has done the same thing with a very minimalistic interface.
Granted, all of these mashups have their shortcomings. They are based on Youtube music videos which tend to get removed every now and then and usually don’t feature the best audio or video quality. Last.fm has announced to stream videos with audio encoded at 128 kbps, twice the bitrate of Youtube. Still, these mashups have upped the bar for Last.fm.
The same goes for many Web 2.0 start-ups that have popped up during the last few months. People have been questioning the commercial viability of mashups for quite some time now. Is it possible to make money, build businesses with someone else’s data feeds?
Maybe that question was wrong from the beginning. Instead, we should have used mashups as a kind of litmus test for commercial web offerings and asked: Is there really a business model for a start-up if someone else could achieve the same thing with a quick mashup?
We’ve seen tons of startups lately that essentially aren’t anything but glorified mashups. Social network aggregators, video and web annotation tools, media conversion platforms: They’re all based on remixing data feeds. Some of these might actually be quite useful – but are they really worth business plans, VC money and acquisition talks? Or are they just tools that someone in some remote place of the world could develop in a day out of boredom?
I talked about this with Pasha Sadri of Yahoo Pipes a couple of weeks ago, asking him whether Pipes will make some startups obsolete by offering DIY mashup tools to end users. He argued that Pipes doesn’t interfere with the current models of monetization. After all, you can just as well build your own web platform based on Pipes and then find a way to make money off of it.
That’s true, but so could the next guy. And he’ll most likely be quicker than you.
Wall Street stumped, surprised by Internet Cos
ANALYSIS (Q1 2007 Earnings Season): Internet companies are playing a game of stump the analysts. And they’re winning.
For the second straight quarter, the research desks on Wall Street have significantly and pretty consistently fallen short in their earnings estimates.
This is no small matter for analysts. Their job is to query the company, talk to its customers and crunch its numbers to distill it all into a single number: an EPS forecast that, if short by a penny or two is no big deal. But a forecast off by 23 cents, as happened with Apple this quarter - well, that can cost clients money. And clients hate to lose money.
Take a look at the graph below. With the exception of Yahoo - whose earnings were among the few tech giants to disappoint Wall Street this quarter - all of their net profits came in at least 9% ahead of the consensus of analyst estimates.
The biggest surprise of all - in every sense of the word - belonged to Amazon, whose 26 cents a share profit was 11 cents, or 69%, above the 15 cents the Street had been forecasting. Most analysts had given up hope that Amazon’s profit margins would ever rebound, with some arguing the company was no different from an old-fashioned bookseller.
Boy were they wrong. Amazon’s net profit more than doubled while its ever-scrutinized operating margin expanded thanks to some spending discipline. Piper Jaffray downgraded Amazon’s stock a day before its blowout earnings. Amazon’s stock rallied 40% in the next two days.
Even Microsoft, which many had assumed was aging into a steady machine of predictable profits, took the Street by surprise Thursday. All of the 34 analyst forecasts were calling for EPS in a narrow range from 45 cents to 47 cents. Microsoft’s number came in three cents ahead the highest of all those forecasts.
Nor is this parade of surprises a one-quarter aberration. In January, when the same companies were reporting earnings for the fourth-quarter of 2006, it was Yahoo who had the biggest surprise. Apple followed closely behind. All of the others had surprises that were at least 9% above the consensus.
What’s going on? Most of these companies were easier to predict a year ago, when the surprises were much more modest. Did they suddenly become harder to read?
Part of the disconnect is due to analysts, who were probably inclined to paint the tech sector with a broad brush, one that foresaw a market slowdown. A slumping housing market was expected to spill over into the economy at large. Overall profit growth this year was expected to be half the 14% rate of 2006.
Within that mindset, most analyst expected some tech giants to come up short: One or two might surprise to the upside, but surely not all of them. But companies like Amazon, Microsoft and eBay, under pressure for years to rein in spending while ensuring past spending would translate into present growth, were starting to deliver.
All of this is good for contrarians and for spectators like us in the press. Aside from Yahoo, these companies have in aggregate several tens of billions of new dollars in their stocks that weren’t there a couple of weeks ago.
But it makes life tough for analysts. Having resuscitated their reputations after the excessive antics of Blodget, Grubman et al, they are now facing a new crisis: Relevancy. If they don’t get a better handle on earnings of the biggest tech names, it won’t be hard to forecast the impact on their own income.
Don’t Blame Panama: The Real Threat Facing Yahoo
Taking a look at Yahoo’s first quarter number, one word comes to mind: heedless.
Not “heedless”, as in Yahoo executives who led the Street on until it believed that, thanks to its vaunted Panama search technology, revenue and profits would surge in the first quarter of 2007. Or even “heedless”, as in investors who had gotten a little ahead of themselves by betting that Panama would deliver sooner than promised.
No, Yahoo CEO Terry Semel was clear on that point a quarter ago: “The first time we see any benefit will be at the end of the second quarter,” he told the New York Times. “Every quarter thereafter we will start to get better.”
Despite that cold dose of reality, Yahoo bulls bid up the stock 19% since that cautionary interview. It could charitably be written off to long-term optimism. But today, people are slamming Yahoo for getting it wrong.
“Yahoo recently overhauled its online advertising system, giving some investors hope for a positive earnings surprise. So far, that hope hasn’t materialized,” the Wall Street Journal wrote Tuesday. Who knew?
Any selling Wednesday on Yahoo’s first quarter results may miss the point. Yahoo could be facing tough times in 2007, but not because Panama didn’t lift profits in the first quarter, but rather because of something that happened last week: Google is finally getting serious about banner ads.
The real threat for Yahoo is that it could well remain on the wrong side of the profit pendulum. Here’s what I mean by that.
Yahoo was a big player in search before Google came along. But it didn’t capitalize enough on that position. Instead, it focused on branded ads (a nice way of saying banner ads - something that regular Web users have learned to either ignore or block, but not enough for Yahoo or, now Google, to care.).
Want to know the dirty little secret of Yahoo’s stock? It’s this: In the two years before Google went public, its stock rallied 376% to $28.61 from $6.01. As of Tuesday, before Yahoo’s first quarter 2007 report, it had risen another 12% to $32.09.
That’s partly because, before Google IPO, investors had nowhere else to put their money than Yahoo. Then came Google, who knew better than Yahoo how to make ad money off search results: that is, no banner, only text ads that maybe, just maybe may be relevant to you.
In other words, the pendulum swung. Search/text ads grew like crazy even if banner ads grew at a more-than respectable pace. Yahoo realized it had to match Google in its intuitive search algorithms, so it began to hatch Panama. It wasn’t an easy proposition. There were critical delays.
Still, Yahoo remained clear about Panama’s timing, warning investors if it would release later than expected - which is more than Google did for the un-beta release of Google News or that Microsoft did for … well, pretty much anything Microsoft ever did. No one ever called Panama vaporware.
And they shouldn’t today. Because the real risk for Yahoo is that Panama is finally catching up to Google right as Google is catching up to Yahoo in its core market of branded - er, banner - advertising.
This could go either way: If you’re a true believer in Google’s instincts, banner ads (along with video ads) will catch up with its text and search ads. But if Yahoo has been right all along, Google is essentially leveling the playing field to Yahoo’s advantage.
The antitrust concerns about the DoubleClick buyout are off mark, but I do wonder if they may help tip the balance from Google toward Yahoo.
Take Semel Tuesday on Yahoo as a alternative to Google: “We have heard concerns from various advertisers, ad agencies and others,” he told Reuters. “My guess is there’ll be some who are fine and there’ll be many who, perhaps, aren’t fine. That’s up to them.”
So it is. Everyone else, place your bets now.
Who will be the real heedless: Investors in Yahoo, which loses ads to Google because of its superior ad-personalization algorithms? Or investors in Google, because Yahoo’s Panama eats into its search pie, while the DoubleClick deal prompts advertisers to defect to the prime alternative, Yahoo?
Thank you, Internet gods. Just maybe, it is once again a two-horse race.
Kevin Kelleher is a writer living in Berkeley, Calif. He has a regular stock column at TheStreet.com and is a contributor to Wired, Business 2.0 and Popular Science. He has previously worked at Bloomberg News, Wired News and The Industry Standard magazine.