The Word At Yahoo! Yikes!

It's taking a bruising as it struggles for a short-term plan

It has been a gut-wrenching turn of events for Yahoo! Inc. The bellwether Internet portal beat analysts' expectations on Oct. 10 with third-quarter revenue of $295 million--90% higher than a year earlier. Not too shabby. But skittish investors, fretting about Yahoo's dependence on advertising for revenues, as well as expected slowing of overall revenue growth to 34% next year, have since pummeled the company's stock by 36%, to $53 a share.

So what can Yahoo do to stem the slide? In the short term, probably not much. Yahoo racks up 90% of its revenue from Net advertising, just 10% coming from e-commerce and business services. That was great when online ad spending was growing 180% annually, as it did from the first quarter of 1999 to 2000's first quarter. But Merrill Lynch & Co. predicts online ad growth will slow to an anemic 8% in 2001.

WAITING GAME. What's more, Yahoo's game plan for diversifying its sources of revenue and creating more measurable and viewer-friendly marketing options is based largely on opportunities that won't be realized anytime soon. Yahoo investors will have to wait for it to serve up ads with video and audio or get a larger piece of the e-commerce pie. "The company is positioned to be one of the dominant players, long-term," says analyst Paul W. Noglows of Chase H&Q. "But the key word is `long-term."'

Put simply, things are going to get worse before they get better. Already, Yahoo's clout with key advertisers is waning. Interviews with several media buyers indicate that the tumultuous online ad market has forced the company to loosen up at the bargaining table. Instead of commanding a fixed price for prime space on its site, Yahoo now accepts deals on a performance basis--that is, it gets paid only when it delivers viewers and customer leads.

Beyond that, the promise of online ads with high-quality audio and video remains just that--a promise. Sure, Yahoo is well positioned to take advantage of spiffy new online commercials when they become possible. After all, it's already broadcasting 90% of this season's NFL games. But the technology necessary to replace static banner ads with more TV-like ads through so-called rich media is still not up to snuff. Consequently, Yahoo President Jeffrey Mallett doesn't see such offerings taking off anytime soon. "We won't see a significant contribution to the top line [from rich media] until the back half of 2001," says Mallett.

TOY STORY. With e-commerce, Yahoo has made major progress, boasting $1 billion in transactions through its network. That's good news because Yahoo gets a fee from tenants in its shopping mall as well as a piece of the revenues. But the torrid growth could slow as some of Yahoo's most loyal partners hedge their Net bets. For example, toy retailer F.A.O. Schwarz, which is both a Yahoo advertiser and retail partner, spends most of its online marketing budget on Yahoo. But that likely won't be the case next year. "We just don't want to have all of our eggs in the same basket," says Michelle Gershkovich, vice-president for new media.

Perhaps the most promising initiative is globalization. Yahoo is among the top 10 Net properties in 12 out of 13 international markets tracked by Nielsen/Net- Ratings Inc. It now reaches an estimated 66 million Web surfers through its 23 global properties--29 million in Europe alone, where it is the most-watched site, according to ratings.

Yahoo is also pushing ahead in Japan, where it reaches 86% of online users. Online ad spending there is expected to swell from $212 million of the nation's $53 billion ad market to $943 million by 2002. "[Traditional] Japanese companies have learned that the Internet is where you find customers," says Thomas Rodes, an analyst with Nikko Salomon Smith Barney.

That means multinational corporations that want to reach massive numbers of Web surfers need look no further than Yahoo. "It's an incredible position to be in," says NetRating's Allen Weiner. True. But only the most hardcore Yahoo followers may want to wait around for the eventual payoff.

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