Yahoo's Ad Slump

More competition for online advertising and soft housing and car markets are taking a toll on Yahoo's ad revenues—and its stock price

by Catherine Holahan

Wall Street had a clear message for Yahoo!: This is your problem, at least right now. After analysts digested the Internet portal's unexpected Sept. 19 announcement of softening in two of its key advertising markets—cars and financial services—they largely stood by the prevailing view that online advertising is still booming, attributing Yahoo's slower-than-anticipated growth to company-specific issues.

Despite Yahoo's unwelcome news, which on Sept. 19 caused its stock to plunge 11.2%, to $25.75, money is still pouring into online advertising as expected, says Shar Van Boskirk, a senior analyst at Forrester Research (FORR), a technology and market-research company. Forrester still predicts that online advertising spending will reach $17.4 billion this year and grow to $26 billion by 2010, making up 8% of the total advertising market that year.

SPENDING SHIFT.

What has changed is that the money is no longer going to just the big three Internet portals—Google (GOOG), Yahoo (YHOO), and Microsoft's MSN (MSFT). Yahoo has additional problems: an ad-placement technology that lags Google's and a greater reliance than rivals on banner ads, which are fading in popularity. Yahoo is also particularly affected by the slump in the housing and auto industries, two major Internet advertisers that are experiencing troubles of their own.

What's more, portals are facing increased competition for ad dollars from newcomers with high traffic and user participation, such as YouTube and News Corp.'s (NWS) social networking site MySpace. "Now portals are not the only option," says Van Boskirk. "As opposed to just plunking my money into online display ads, I can put it into social networking, or video sites, or game sponsorship" (see BusinessWeek.com, 3/7/06, "MySpace: Your New Classifieds Service?").

TARGETED OPTIONS.

A car company, for example, can put ads on a host of car-buying sites such as cars.com, as well as post commercials on highly trafficked video sites and develop a social networking fan community for a particular car, says Lisa Phillips, an analyst at eMarketer. The availability of such highly targeted options is likely cutting into the market for online display advertising, such as banner ads, which Yahoo has traditionally offered.

The new targeted advertising options are typically more expensive than banner ads, Phillips says. However, marketers are willing to pay the price for the greater sales they derive from a targeted approach. David Hallerman, a senior research analyst at eMarketer, predicts that behavior-targeted online ad spending will reach $1.2 billion this year and surpass $2 billion by 2008. "Behavioral targeting costs more, so advertisers are still spending online," says Phillips. "It's just that they are not putting out as many ads."

The demand for such targeted advertising presents a bigger problem for Yahoo than for some other major Internet players because its targeted-search advertising business has not grown to the same extent as that of main rival Google. As a result, it is more vulnerable to a switch from banner ads to other more targeted options. The release of its more targeted advertising system, Panama, has been delayed and now isn't expected until the first quarter of 2007. In a Sept. 20 note to investors, Goldman Sachs (GS) analyst Anthony Noto said Panama would ultimately be positive for Yahoo.