Why Yahoo's Panama Won't Be Enough

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In September, Yahoo announced it was experiencing a softening in the autos and finance markets. While Yahoo suggested that the slump was due to several advertisers cutting back on their advertising budgets owing to industrywide slowdowns, analysts speculated that a couple of major advertisers were taking their business to cheaper online advertising sites and ad placement companies able to offer similar and new targeted options. Analysts believe Yahoo's clients may have put some of their money into MySpace and others rather than spend it all with Yahoo, thus accounting for the slower-than-anticipated growth (see BusinessWeek.com, 9/21/06, "Yahoo's Ad Slump").

Every Last Drop from Content

For an established company such as Yahoo to grow at a significantly higher rate than the online ad market, it can't just rely on making more from search-related text ads. Such ads currently make up only 46% of the online advertising market and will grow to just 49% of the market by 2010. The majority of online advertising is still focused on increasing brand awareness, according to JMP Securities.

Yahoo has to wring more money from all of its available inventory. That means attracting advertisers to the social-networking and user-generated content that has ballooned on Yahoo's site, in some cases growing faster than Yahoo's premium properties and creating tons more inventory on which Yahoo can serve ads. Yahoo's photo-sharing site Flickr, for example, had 200 million page views and 7.2 million unique users in November, according to Nielsen//NetRatings. Yahoo! Autos, by comparison, had 61.7 million page views and 3.8 million unique users (see BusinessWeek.com, 10/2/06, "Yahoo's Strategy: Growth by Acquisition").

One way to do this is to retarget ads in a similar way to what TACODA does. The extra targeting would allow Yahoo to charge more. It does do some of this already, but it could apply this method throughout the long tail of its properties and more aggressively on its key social media sites. Flickr has some advertising but not much, and Del.icio.us doesn't seem to have any ads.

What's Another Billion Dollars?

Another way is to ensure advertisers pay as much as possible for such "nonpremium" advertising through bidding. In October, Yahoo announced it had become a majority investor in Right Media Exchange, an ad marketplace. It has tasked the company with auctioning off its nonpremium space, such as the social-networking inventory and e-mail, to the highest bidder. The hope is that as advertisers duke it out to be top bidder, Yahoo will collect the highest cost per click or cost per impression possible.

However, making a ton from these properties will not be easy. David Hallerman, a senior analyst at eMarketer, says that Yahoo will never be able to charge true premium prices for advertising on social media and networking sites. "It is still going to be relatively low-priced ads in contrast to the autos or finance sites," says Hallerman.

Caris & Co.'s Boyd estimates that, if Yahoo were to develop the right formula for placing ads on its social media and user-generated content sites, it could add $1 billion in revenue—but not for several years. "I think you are talking about an opportunity that could probably add an incremental billion in revenue three or four years from now," says Boyd. "But I don't think they are really going to be in a position to move the needle next year."

Still, if Yahoo hopes to get back in the ring with Google anytime soon, it can't pull any punches.

Holahan is a writer for BusinessWeek.com in New York.