Yes, Yahoo Can Search for Growth


By Ben Elgin Yahoo! is taking its first baby steps to challenge Google for supremacy in online searches. But will the portal's efforts to rebound in this lucrative market be enough to sustain its valuation of a lofty $33 billion? The early answer is yes. Sure, it's a tough price to stomach. Yahoo's (YHOO) stock, trading around $49 as of Apr. 1, represents a heady price-earnings ratio of 92, nearly double the Internet sector's average.

But any success in buttressing its position in search-engine advertising -- a market expected to grow 133% in the next two years, to $4.8 billion -- could make that p-e ratio palatable. "Yahoo has a very compelling value proposition [in online searching]," says Scott Kessler, equity analyst at Standard & Poor's. (Yahoo hit No. 27 in this year's BusinessWeek 50 ranking of the country's top-performing companies.)

For years, Yahoo overlooked search as a commodity service that couldn't make money. It rebuffed acquisition overtures by Google's founders in 1998 and actually helped put Google on the map two years later by adopting the startup's search technology. Then as Google's own site became dominant, Yahoo went from directing 56% of Internet searchers in early 2000 to 28% by early 2004, according to researcher WebSideStory.

BUYING BINGE. Yahoo, however, appears to have stemmed the losses lately. It shelled out $2 billion last year to buy major Google competitors Overture Services and Inktomi, then successfully integrated the acquisitions into its own operations on schedule. On Feb. 17, after showcasing search results from Google for nearly four years, Yahoo uncorked its own search technology to upbeat reviews.

On Mar. 26, Yahoo continued its search acquisition binge, shelling out over $550 million for Kelkoo, a European comparison-shopping engine. And in the coming months, it will be exploring ways to use data from its 133 million registered users to personalize its search results. "This is the best search technology we've offered to date," says Jeff Weiner, Yahoo's senior vice-president in charge of search.

Sure, Google announced a dramatic countermove of its own on Mar. 31, when it said it plans to offer free e-mail, dubbed Gmail (see BW Online, 4/1/04, "Google Drops an E-Mail Bomb"). But Google has a lot of catching up to do in this segment.

DEEPER RELATIONS. Yahoo has unique assets it can leverage to boost its presence in online searches. Because of popular nonsearch features, such as its own e-mail service and online personals, Yahoo is neck-and-neck with Microsoft's (MSFT) MSN for the most overall Internet traffic. According to Nielsen/NetRatings, the portals handle over 60% more visitors than Google each month. That means plenty of Google users also use the portals, and that gives Yahoo and MSN every opportunity to entice searchers back to their products.

The depth of Yahoo's relationships with users could also prove helpful. All of the search engines are exploring ways to better personalize searches, which typically consist of only two or three words typed into a query. Ideally, by looking at a searcher's profile, an engine could determine if somebody searching for, say, "Apple" is more interested in computers or recipes. Even sooner, engines such as Yahoo could take a query with local needs, such as "plumber," and tailor results to the searcher's Zip code.

Such efforts at personalization give a major edge to Yahoo. Over 133 million visitors have registered there for services such as free e-mail accounts or fantasy sports, supplying data such as Zip code and gender. By comparison, Google interacts very little with visitors and accumulates much less data. Its free e-mail service isn't expected to launch for several more weeks, or perhaps months. Its only endeavor to date with heavy customer interaction is Orkut, a social-networking experiment that has notched 150,000 users in two months.

MICROSOFT CHALLENGE. Finally, Yahoo has an advantage among the biggest Internet advertisers. Sure, Google's network of 150,000 search marketers, of which many are small businesses dabbling in Internet advertising for the first time, outnumbers Yahoo's by as much as 50%. But many big advertisers prefer splashy, animated ads, which only portals tend to carry on their nonsearch offerings. (Google has refrained from these ads to avoid slowing down its results pages.)

By offering such ads, Yahoo has bolstered its relationships with major auto makers and entertainment giants. For instance, the total number of movies promoted on Yahoo jumped from 17 in 2001 to 136 in 2003. But this remains challenging terrain for Google. For one, Terry Press, marketing chief of Dreamworks, says she was approached by Google but chose to stick with Yahoo. "People don't go to Google to learn about movies, they go to search for things," says Press.

Still, Yahoo has challenges to overcome. For starters, Microsoft is seeking ways to integrate search technology deeper into the Windows operating system, where it dominates the market. This could allow Microsoft to put a search box directly on the desktop, which would likely make it the search engine of choice for many users.

COMMERCIAL SKEW? Several years in the future, Microsoft might even be able to create a "universal search box," capable of perusing with a single click everything from archived e-mail to Word files stored on the desktop to Web pages. In that case, both Yahoo and Google would be hard-pressed to compete.

In addition, Yahoo needs to be careful that its search offering isn't viewed as overly commercial. The portal stirred up controversy after its February search launch by reiterating its support for the business model of "paid inclusion" -- where commercial sites pay the engines to be included in its search results. By comparison, Google has vowed never to engage in paid inclusion for its search results in the belief that it undermines consumer trust.

Indeed, some early signs already show that Yahoo's service may be getting skewed by commercial concerns. By objective measures, a search for the term "equinox" probably should be more geared toward science than commerce. Surprisingly, Yahoo's search thought otherwise, returning reams of commerce links, from Chevrolet's Equinox to Equinox-brand water filters, requiring the user to scroll down a bit to find the first scientific link. While Yahoo's search deemed the Chevy Equinox homepage to be the second-most relevant result, Google pegged the same site at No. 46. All told, 65% of the links on Yahoo's first results page were commerce-related, vs. 27% on Google.

Happily, such discrepancies aren't the norm. In fact, most Yahoo searches return results that are comparable to Google's. As long as Yahoo avoids overreaching, it can probably go head-to-head with any rival, including Google. That, of course, could reassure investors by making Yahoo's lofty share price appear a bit more reasonable. With Ronald Grover in Los Angeles

Elgin is a correspondent in BusinessWeek's Silicon Valley bureau


Coke's Big Fat Problem
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus