Increased Competition Hurts Yahoo Japan

It's still the favorite Japanese Web portal, but Google and others are closing in. Ad growth is slowing, and the stock is down

By Kenji Hall

While Yahoo! (YHOO) was fending off an unsolicited buyout bid from Microsoft (MSFT) earlier this year, the fate of the Web portal's Japan unit looked uncertain. Would Yahoo unload its 33% stake in Yahoo Japan (4689.T) to appease unhappy shareholders who were demanding that the company raise its value?

Yahoo would have had no trouble finding a buyer. As Japan's most popular starting point on the Net, Yahoo Japan has a sizable lead in online search over its closest rival, Google (GOOG), attracting more than 46 million unique visitors a month, compared with Google's 36 million, according to comScore (SCOR). The Tokyo entity's valuation of $22 billion makes it worth almost as much as the Silicon Valley company that spawned it. And this year Yahoo Japan's operating profit could rise 15%, to $1.3 billion, on a 7% gain in sales, to $2.6 billion, according to NikkoCiti (C) forecasts.

But some analysts think Yahoo Japan is losing momentum. The stock is down more than 17% since the beginning of this year, matching the benchmark Nikkei 225 stock average's 18% decline. Both Internet ad revenue growth and new subscribers to its low-cost broadband service are slowing, and with the Japanese economy showing signs of stalling (BusinessWeek, 9/4/08) even the company's top brass is worried. "Given the contraction of the mass media ad market, it has become harder for Net ads to continue expanding," Yahoo Japan CEO Masahiro Inoue told Nikkei Business magazine in an interview last month.

Losing Altitude

That's why a highflier like Yahoo Japan dropped from 32nd place to 76th in BusinessWeek's rankings of Asia's fastest-growing companies. It's fighting in a crowded market for an estimated $5 billion in online ads in Japan this year, according to Dentsu Communications Institute, a unit of Japanese ad giant Dentsu. Recently, Google has been bolstering the features on its Japanese-language site and tweaking local mobile services to help users find what they're looking for. Chinese search engine giant Baidu (BIDU) barged into the Japanese market with a local site in January. And News Corp. (NWS) is slated to launch a bevy of online ad services in Japan, and has said it's casting about for an online ad agency to acquire.

Some industry executives say Yahoo Japan's strength in generic search is also its Achilles' heel. The site is ideal for pulling up train timetables and connections, general news, or the latest Olympic medal count, even from a cell phone. But the country's 108 million cell-phone subscribers aren't just looking for information. They buy an estimated $8 billion to $12 billion worth of stuff online annually. But in most cases Yahoo assumes users are looking for information, not items to purchase, so shoppers get results faster with Rakuten and Amazon (AMZN). "With the megaportal model, [Yahoo Japan] can't do everything well," says one search company exec who asked not to be identified because he does business with Yahoo.