Yahoo's Yodel Turns Into a Whimper

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Online Resilience?

Others, however, believe online ads are at least somewhat insulated from a slowing economy. The idea is that an influx of marketing dollars, redirected from television and print, would more than compensate for any economy-related slump. For instance, chipmaker Intel (INTC) expects to spend at least half of its marketing budget online this year, compared with just 15% two years ago, because the Web helps it better reach people who buy computers with Intel chips in them. "We really want to get close to that sale" with search and online display ads, says Corey Carrillo, Intel's worldwide search-engine marketing manager. Historically, the company has emphasized its brand.

Yahoo executives said there were some areas of weakness in display advertising, such as finance, travel, and retail. President Sue Decker implied that was probably due to the slowing economy. But she said the weakness was largely offset by strength in other areas. Yang said display-ad revenues strengthened in the second half of last year, growing 20%.

Yahoo said its search advertising grew 30% from a year ago. What's more, Decker said revenues per search query grew 20%, about the same gain as in the third quarter. She attributed the bulk of the growth to improvements in the rate at which users click on search ads, thanks to Project Panama, the company's search-ad effort launched about a year ago. But none of that has kept Yahoo from falling further behind Google.

With Yahoo failing to attract a larger base of searchers, advertisers hesitate to spend significantly more on its search ads. "We give them every dollar we can," says Kevin Lee, executive chairman of digital marketing firm Didit. "But if they don't have the traffic, there's nothing for us to spend the money on." Indeed, Yahoo keeps losing ground in search to Google. According to Nielsen Online's numbers, usually the most conservative measure of the market, Google's share of searches in December was 56.3% to Yahoo's 17.7%, and Google got 70% more searches per searcher than Yahoo.

Marketers know it, and that's why they're still not spending big on Yahoo search. A new analysis by search marketing firm Efficient Frontier says overall search ad spending on Yahoo fell 3.8% in the fourth quarter from a year ago. As a result, Google's share of search ad spending rose to 76.6% from 70.5% a year ago, essentially capturing 97¢ of every additional dollar spent on search advertising in the past year. "Google continues to be the big engine that could," says Efficient Frontier CEO Ellen Siminoff.

Cuts Alone Aren't Enough

Yahoo also faces challenges in other areas of its business. A deal with AT&T (T) had given Yahoo a monthly fee for each broadband subscriber it attracted. Now, Yahoo will get only a share of revenue for ads it sells on AT&T sites. Although it gets a one-time payment of $300 million to $400 million from AT&T this year, the new deal will cut Yahoo's guaranteed revenues, which analysts had estimated at about $250 million a year.

As Yang's vow to keep spending on some initiatives indicates, Yahoo's hope remains coming up with new services that catch people's imagination as Google, MySpace (NWS), Facebook, and other sites have. "You can't cut your way to prosperity," notes Siminoff. But when Yang took over as CEO last July, he promised he'd spend the next 100 days crafting a new plan for the company. At nearly 200 days and counting, investors clearly believe he needs to pick up the pace.

Hof is BusinessWeek's Silicon Valley bureau chief .