The good news for Yahoo! (YHOO) is that it won’t be forced to jump off the Alibaba gravy train.
Yahoo owns about 24 percent of the soon-to-be-public Chinese e-commerce company, and on Tuesday revealed that it persuaded Alibaba Group to allow it to retain more of its stock once the shares hit the open market. The two companies have an agreement that Yahoo will sell a chunk of its stake in Alibaba, which it acquired in 2005. Yahoo had committed to selling 208 million shares, and now it has to sell only 140 million.
Then there’s the bad news. Yahoo’s good fortune with Alibaba hasn’t yet translated into a better outcome for its primary business: advertising. The company’s revenue is down from last year, including search revenue—its biggest source of income—which dropped about 8 percent. Yahoo is actually selling more display ads but is having to accept less money for each of them. It says its price per ad fell 24 percent from last year.
On Tuesday morning, EMarketer said Yahoo’s share in the ad market will fall behind Microsoft (MSFT) this year for the first time. The contest isn’t exactly a race to the top. “Though Yahoo is growing (slightly) this year, the ad market continues to grow far more quickly ahead without it,” EMarketer’s Dan Marcec wrote in an e-mail. “We project Microsoft to grow essentially at pace with the market this year, which would allow it to pull ever-so-slightly ahead of Yahoo.”
This doesn’t reflect positively on Yahoo Chief Executive Officer Marissa Mayer, whose strategy has been to create a sprawling media empire that eventually learns how to cash in by showing people advertisements. But the Alibaba windfall allows the company to double down on its acquisition spree.
Yahoo says it will give half of the post-tax cash it raises during the Alibaba IPO back to its shareholders. This leaves it with half to try to go after a successful media startup, such as Hulu or Spotify. Cash is one thing, but more Alibaba stock could mean a further payday for Yahoo if the company does as well as expected in the public markets. The Alibaba effect is likely to make some startup out there very happy in the near future.