Yahoo's Strategy: Growth by Acquisition

Recent additions to the fold have fared well on CEO Semel's watch, but the company also needs to ensure a payoff in the future

Yahoo!'s shopping spree is showing no signs of letup. During the past 18 months, the online media and search giant has acquired photo sharing startup Flickr, social bookmarking site, and Upcoming, a user-generated social events calendar. It has also tried to acquire social networking site Facebook for upwards of $1 billion.

On Sept. 27, Yahoo Chief Executive Terry Semel added San Francisco's JumpCut to the company's social media mix. JumpCut, purchased for an undisclosed amount, lets members create short films by sharing, editing, and combining user-generated clips with stock footage and their own videos.

There's a method to Yahoo's (YHOO) marauding madness. Each conquest is aimed at bringing in additional tech know-how, targeted audiences, and features that will engage users longer. In the short run, the acquisitions should deliver on those assurances. "It will certainly help them grow," says American Technology Research's Rob Sanderson.


  The acquisitions are also likely to pay off financially as well, says Todd Dagres, a venture capitalist and general partner at Boston's Spark Capital. "If you take these smaller brands and you plug them into the Yahoo ad infrastructure, they should quickly increase the ad revenue for them," says Dagres.

It's not like the companies cost a lot. Yahoo hasn't disclosed the price of recent acquisitions, and Dagres estimates that most went for the single- or low double-digit millions. The most expensive,, is rumored to have cost between $15 million and $30 million. Yahoo generated almost $1.6 billion in sales in the second quarter alone (see, 10/21/05, "Google and Yahoo!: Rolling in It").

Plus, advertisers are awakening to the appeal of social networking. The sites offer new and highly targeted real estate for which advertisers are increasingly willing to pay a premium. U.S. ad spending on social networking sites such as Flickr and MySpace will increase from $280 million this year to $1.9 billion by 2010, according to eMarketer. The company predicts that online advertising will grow from $15.9 billion this year to $25.2 billion in 2010. "I think definitely in the short term, a lot of advertisers want to experiment with social networking right now," says eMarketer analyst Debra Aho Williamson.


  Yahoo's recent acquisitions have fared well under their new owner. Since Yahoo bought Flickr in March, 2005, it has become one of the top ten networking sites, according to June figures from comScore Media Metrix. has grown from roughly 300,000 subscribers, when Yahoo bought it in December, 2005, to 1 million this September (see, 9/25/06, " Hits 1 Million Subscribers").

Yahoo is already working on how it can use its advertiser relationships to turn JumpCut into a cash cow. JumpCut CEO Mike Folgner says the company will be able to offer more advertisers the ability to submit branded video content that users can "remix" and integrate with their own material, encouraging them to form a relationship with the brand. "With Yahoo we can basically take that package and offer a big media buy," says Folgner.

But what about the long-term payoff? For Yahoo, just bringing in more money isn't enough. Yahoo is already the leading destination on the Web, according to comScore Media Metrix, and sales were almost $1.3 billion in the second quarter of 2005—before Flickr could be integrated. What Yahoo really wants is to become the leading company in social media and related search. "Google has taken a big chunk out of the paid search area, so they have to make sure that they are strong in other areas," says Dagres.


  How else to stand apart from Google (GOOG), the leader in search based on mathematical models, asks Denise Garcia, an analyst at WR Hambrecht + Co. Other than buying Blogger in 2003, Google hasn't made an aggressive push into social media. "Google dominates the algorithmic search," she says. "And while I certainly don't think the chapter is closed on search simply because Google has been so successful…I think Yahoo's ambitions are to become a larger media and entertainment company of the future."

Unlike Google, which has concentrated on building its own properties from the ground up, Yahoo has relied on acquisitions to bring in the necessary talent, audience, and technology. It's a strategy that has served Semel & Co. well. Yahoo got into search through its $1.63 billion purchase of Overture and is now a solid No. 2, ahead of Microsoft's (MSFT) MSN and

However, acquisitions are also fraught with long-term challenges that are largely avoided when companies build their own products. Chief among these are retention and integration. When a company develops new technology in-house, it often relies on homegrown engineers who have a relationship with the company and are invested in its future. The staff of an acquired company doesn't have that same relationship or potential loyalty. More important, the big-idea guys who made a startup successful have an entrepreneurial bent that can lead them to seek new ventures. So far, Yahoo has retained key figures such as founder Joshua Schachter and Upcoming's founder Andy Baio.


  Integration has been a bigger problem. Yahoo has struggled somewhat to develop a targeted search ad platform that works with Overture's technology and delivers ads as well as Google. Its solution, Project Panama, has been continually delayed and is now not due out until the first quarter of 2007 (see, 9/21/06, "Yahoo's Ad Slump"). "With the Overture deal, we still have the problem of integration," says AmTech's Sanderson.

To tap the full potential of its new social media sites, Yahoo wants to enable the various businesses to share files and technology with each other, says Jason Zajac, Yahoo's general manager of Social Media. Yahoo hopes to incorporate video from JumpCut into its other media and video sites. "We are looking forward to making the JumpCut creator tools the centerpiece of the user creation process on Yahoo video," says Zajac.

Zajac concedes that these businesses could find a way to work together even outside Yahoo's ownership and without its expertise. But he's confident that Yahoo can make the process happen faster and more seamlessly. Making sites coded in different formats work together under the Yahoo umbrella may be a lot easier for in-house developers than for those brought in from the outside.


  Another, harder-to-solve challenge is keeping the cool factor. The most successful social media sites, such as Facebook and News Corp.'s (NWS) MySpace, started as small, independent companies that grew in a grassroots way into heavily trafficked sites, where users continually supply content. The worry is that people who thought the sites were cool when they were run by a few smart college kids with minimal advertising won't keep coming once the sites are run by big corporations.

To date, that hasn't been a problem for the major social networks. MySpace still had 51.4 million unique visitors in May alone, according to eMarketer. Still, it has only been owned by News Corp. for little over a year (see, 7/18/05, "News Corp. Buying MySpace: Native Internet Media Taking Off").

And building from the ground up has its own cool-factor challenges. Indeed, Yahoo's effort to build a social networking site—Yahoo! 360—hasn't been that successful. The site, which had 3.4 million unique visitors in May, according to Nielsen//NetRatings, ranks behind MSN Spaces, Six Apart, Facebook, Classmates, YouTube, and MySpace.


  According to a May comScore study, even little Flickr had more users. Google has faced similar problems building its own sites. Outside of its search business, it has yet to have a market-leading venture despite launching several new applications each year (see 7/10/06, "So Much Fanfare, So Few Hits").

It may be that sites built in-house take longer to take off, but are better in the long run. AmTech's Sanderson says he has been impressed with the gradual improvement of Google's new products. "Google takes a lot of heat for not coming to market with the best-in-class finance site. But I've been pretty impressed with the rate these things are improving," he says. "They can implement technology really fast."

However, it's also possible that—when it comes to social networking—sites can't be successfully grown by a big corporation. Even Google purchased blogging site Blogger in 2003 rather than build its own version. "Sometimes it is just easier to sit back and see where the flowers are growing and then go pick the flowers," says Dagres. "And that's what [Yahoo] is doing—picking the flowers."

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