Soon after learning to code in HTML around 1997–1998, I created a website to promote my “web development” services. Eager to drive some traffic to it, I went to the Yahoo! Directory and added it to a number of categories, hoping to get some views. Almost overnight, I got hundreds of hits and a few people even emailed me (on my yahoo email address, no less). Yahoo! was the centre of the internet.
15 years later, most of the company’s market cap is placed on its Asian assets. Yahoo! is currently valued at roughly $40BN. They have ~$35BN in assets (Alibaba, Yahoo Japan, cash) and ~$5BN in annual revenue. So the markets are valuing Yahoo!’s core business at 1x revenue. That’s not a great market position to be in, and there are a few reasons for it:
1. The core business, selling display ads across the Yahoo! portfolio, is shrinking, down 7% in Q2 2014 compared to the same period of 2013.
2. The search business is stagnating, with only 6% growth year on year. Even worse, most of the growth is due to an increased price per click (which isn’t sustainable in a world dominated by Google).
3. Despite all of all the acquisitions they’ve done over the past year, mobile is still not showing significant results. It’s not even big enough to become a separate revenue line item, so it’s bundled together with the $219m in revenue from “other” sources Yahoo! reported in Q2 2014.
I think Mrs. Mayer’s efforts haven’t made a bigger impact because she’s been trying to compete in the wrong markets – search & mobile. Search, she should very well know, is dominated by Google and there’s no way anyone in the space can compete with them on that. Mobile, as she’s recently discovered, is dominated by Facebook, who’ve done an impeccable job in becoming a mobile-first company. It’s hard competing with these two companies due to the sheer amounts of data they have in order to help advertisers make the most of their budgets.
What Yahoo! does have, though, is a very popular destination portfolio. Unfortunately, it doesn’t seem to be helping with the top line, as their display revenue is decreasing. That’s mostly because the display advertising markets have become very efficient (hence, advertisers are paying less to achieve their goals).
So search, mobile and display are a hard for Yahoo! to compete in. What’s left is video, so let’s look at that for a moment and pretend we’re Marissa Mayer:
1. Premium content is owned by broadcasters, the long tail by YouTube. If you look to the middle of the market (decent quality of content, lots of scale), there are a few companies doing very well (TubeMogul, BrightRoll, who don’t actually own content but have done a stellar job to bundle together good quality inventory). Yahoo! could acquire any of these companies for a decent amount of money ($1BN — $2BN).
2. Digital video advertising is growing at 30% / year, estimated to exceed $10BN globally next year. CPMs are high, and they’ll stay like that for the foreseeable future due to the scarcity in quality video inventory.
3. Over the next 10 years, linear TV budgets will start shifting into digital, so there will be tens of billions of advertising dollars that Yahoo! could pick up if they were relevant in the space. This would set the company up nicely for the future, which would make the public markets put a higher value on the company’s core business.
I’m sure Mrs. Mayer has plenty of smart advisors to help her make decisions, but if I were her I would spend $2bn on buying BrightRoll, which will instantly add $500M of video revenue to the top line. I’d spend another $1bn on buying the market leaders in critical areas related to video (creation, delivery & streaming, ad formats, programmatic). And then, after becoming reasonably relevant in video through M&A (12–18 months), I’d merge with AOL or Hulu and use my financial muscle (read: Alibaba assets) to create original content and compete head to head with Netflix.
Sadly though, this strategy won’t fly with a Silicon Valley type like Marissa, because it’s a very un-Silicon Valley thing to do: follow the money, not the users.