Yahoo! The name speaks volumes. It has become synonymous with the Web. Yes, I know, analysts and media pundits today consider Google as the Web’s bellwether, but the fact remains that the one company that best represents all-thing-Web - getting news, looking up stock quotes, reading horoscopes, checking email and even searching - remains Yahoo!
Indeed Google accounts 50% of market share amongst search queries, but not everyone spends their time online searcing, many people navigate from one website to another by good old fashion hyperlinking. And in this context, Yahoo! remains king. That is why Yahoo! is to this day the most visited web site in the world. Yahoo! leads the market in terms of total unique users and pageviews, ahead of AOL, MSN and yes, even Google.
But if this is so (and it is), then why does Google generate so much more revenue than Yahoo! and why does Google command a market capitalization of $140 billion compared to Yahoo!’s market value of $30 billion.
Please note that I own shares in Yahoo! and not in Google. Please note as well that I am not alone in thinking that Yahoo! presents the more long term sane play on the Web.
But to truly understand why Google command such a premium, you need not look further than what each company does.
Let’s take a look. Shall we?
Google is a search pure-play; Yahoo! is a play on the Web. Paid search commands 40% of the online ad market because it is a rather effective way for small and medium sized businesses to reach their consumers and grow their business. Much the same way that consumers drive 66% of the economy and corporations account for 34%, Google will over time represent what individuals and small businesses do to build their business while Yahoo! will represent a metric for what
large corporations do to grow their business through advertising. After all, Yahoo! has advertising relationships with the Top 200 advertisers in the world; Google, probably not. This is why it bought YouTube, because large advertisers look favorably at video advertising and YouTube - despite its threats - represents a way for Google to penetrate that market.
But to understand why Google is worth over three times what Yahoo! is worth, one needs to wear both the ad executive and user hat to comprehend.
Automotive and Financials are Not Representative of Online Advertising
Indeed, automotive and financial advertising represent large segments of the total advertising spent on the Web, but each one is unique. Automotive advertising is one of the largest three segments - along with entertainment and health - but each one has a tendency to spend their money on endemic sites (ie. GM on Cars.com, Pfizer on WebMD.com). Moreover, each client type has a different reality they face online: financial advertisers tend to be ROI oriented and advertising on a mass market site like Yahoo! is probably not as efficient as advertising on niche sites that reach those who are looking for financial advice. Automotive advertisers too like endemic sites but the truth is that 2006 has been a bloody year for major advertisers (GM, Ford, etc). Today Ford announced quarterly losses of $5.8 billion. When a company gets that pummeled, advertising is one of the first expenses to get cut. As such, it was not a surprise to see both impact Yahoo!’s Q3 results. Of course, it is specifically because both are large spenders that a cut in their spending affected the largest site on the Web.
It’s the Inventory, Stupid
The reason why Yahoo! has a unique problem is that it is so large and boasts such a large inventory of ad spots that it needs to optimize its ad inventory. This is the root of its problems and explains why Yahoo! recently bought a 20% stake in Right Media, a company that manages an auction-style service for companies ad inventory.
Yahoo!’s Reality: It’s a Portal Mate
Yahoo! has a lot of traffic as the most visited website, but it has relatively little valuable real estate. Don’t get me wrong: it has a lot of valuable real estate, but relative to its total inventory, a lot of it is probably simply not too valuable.
Yes, every website would die to be Yahoo!, but the fact remains that Yahoo! is simply not being very creative at managing its burgeoning traffic. Coming out of the dot com bust, Yahoo! managed to gain traction and manage its unsold inventory by pushing its own revenue-generating services. This is why many of Yahoo! paid-for services have grown: it has leveraged its own unsold inventory and traffic to market the services it offers.
User Profile
I probably spend a good chunk of my day on both Yahoo! and Google’s media properties. The first two browsers to load up on my laptop are Gmail and Yahoo! Once on Yahoo’s main page, I log in to My.Yahoo.com. I have browsers sitting on both sites all day long. On average, I am on each site 8-12 hours per day. But it’s what I do on each site that explain the variance in valuation and profitability of both sites.
Bachelor #1: Yahoo!
I visit Yahoo! and indeed spend practically the entire day on My.Yahoo.com to get news, stock quotes, horoscopes etc. I am not necessarily actively on My.Yahoo.com, but more often than not, My.Yahoo.com is open in one of my many browsers.
Bachelor #2: Google
Incidentally, when I am logged into Gmail, I am not doing much other than checking my email. While I do that, I do not generate any revenue for Google per se. The problem (for Yahoo!) is that I have downloaded Google’s toolbar and use it for all of my searches. Before I downloaded it, I would simply go to Google.com.
In other words: I search through the Google toolbar even when I am on Yahoo! This just might be the biggest nigthmare facing Jeff Weiner, VP of Search at Yahoo! and Terry Semel, CEO of Yahoo! Does this mean I never search on Yahoo!?
No. I have developed a search engine and as such, the only time I find myself searching on any site other than Google is to compare results. I surely do not want to knock Google, but I do not even think that Google’s results are better than MSN or Yahoo!, I have simply, like 50% of searchers, developed a habit of thinking Google when I want to search. This is an insurmountable lead for Yahoo! and MSN Search. Microsoft can overcome this if it bundles its search into Explorer or the next OS, and you can imagine that Google’s lawyers are spending extra time in batting practice to avoid that from happening.
Yahoo and Google’s Success at Monetizing Traffic
At first glance, there is no reason to think that Yahoo! is not as successful in monetizing its traffic.
According to Alexa, Yahoo! generates 17.3 pageviews per unique user, Google generates 6.3 pageviews per unique user.
In fact, if you think that Yahoo! “charges $20 CPM” then you would think that if a user generates 17.3 pageviews - or 35 ad impressions (2 ads per page) - then Yahoo! should generate roughly $0.70 per visit.
Conversely, if Google generates 6.3 pageviews per user (assume that a user conducts 5 searches and on one search they get to the second results page) then a user conducts five searches in a given day. We know that paid clicks - what drives Google’s revenues get clicked on anywhere from 1% to 30% - yield about 10% CTR, and each Google click generates about $1.25 revenue per click, then Google generates about $0.72 per user per day. Right there, one would think that Yahoo! has a higher monetization rate than Google does. Of course, this is myopic, read on to find out why.
Let’s take a look at user surfing patterns: On Yahoo!, people claim high CPMs on the most valuable real estate: ie. the main page. But ask yourself: what percentage of total impressions you generate on Yahoo! go to the main page? Of course, Yahoo!’s ace is that they hold a lot of personalized information on users through My.Yahoo.com. I signed up to My.Yahoo.com when I began working on the web in 2000 at a search engine and gave them basic personal information. Over the years, it’s safe to assume that Yahoo! knows a lot about me.
Some estimate that Yahoo! can generate CPMs as high as $20 CPM. But that does not mean that Yahoo! generates $20 CPM on all pages and impressions.
Think about: I visit Yahoo.com and generate an impression. I log in to My.Yahoo.com and generate a lot of impressions: I read a handful of articles, see a few stock quotes, read my horoscope and throughout it all, I click back to My.Yahoo.com a number of times. All in all, I see anywhere from 12 to 25 pages per day (I am an anomaly, my number is much, much more; but at least on Alexa, the average pageviews per user is 17.3). Smack two ad impressions per page and the average impressions per user is 35. The problem for Yahoo! is that the first impression it serves is its most valuable, since the advertiser paying the highest rate gets served first; each subsequent ad impression suffers from diminishing value. And, on top of it all, Yahoo! can charge a lot for My.Yahoo.com ad impressions because the impression is tailored to my interests but many of the articles I read generate marginally less valuable real estate. And while ads on stock quotes and the like are targeted indeed, financial advertisers (on stock quotes) ultimately yield a higher ROI on financial sites than they do on Yahoo!’s finance pages. The point of this illustration is that while Yahoo! retains a lot of users’ attention, the value of their inventory drops off considerably the longer a user remains on the site.
The important nuance is that on Google, every search I conduct retains value. To Google’s quants, it’s irrelevant how I spend my time on Google, for every incremental search’s value is independent to the previous action I undertake on Google.
Value is Relative
The fact of the matter is that while the marginal value of a Google search does not trail off, the marginal value for a Yahoo! impression does. In fact, Yahoo! does not generate $20 CPM, its eCPM is far less. Take my traffic partners for example: say I represent the average surfer and generate 17.3 pageviews - and this almost 35 impressions.
As the table above shows, Yahoo! does not yield $20 CPM on all of the pages I visit. On some, and the bulk, it generates much lower CPMs. In my admittedly primitive model its eCPM plummets to $7.30 (and I would estimate that it overall eCPM is much lower, hence why it even bothered buying 20% of Right Media). In this model Yahoo! revenue per use is $0.25, just less than a third of Google’s! And, right now, Google is valued at over three times Yahoo!’s value; remove the cash on the balance sheet and you will see that the ratio between enterprise values is remarkably close to the ratio between Google’s monetization rate per user and that of Yahoo!’s.
As this example demonstrates, it is not Yahoo! total traffic that is to blame, but rather, it’s the fact that Yahoo! and Google are as competitive as HP and Walt Disney are; no one would compare HP and Disney in the same category when it comes to profitability, yet we lump Google and Yahoo! in the same pool, perhaps due to the Web’s infancy.
There are obviously many other variables at play here: Yahoo! does own some 30% of market share in search queries, though it was a weaker monetization rate than Google. As well, Yahoo!’s overall traffic is higher than Google, so it should be able to generate more revenues in aggregate. But, as this model demonstrates, Google and Yahoo! are quite different when it comes to revenue models; the sooner the market understands and accepts this, the sooner will Google and Yahoo!’s variance in market capitalization converge.
Disclaimer: I own shares in Yahoo! but that does not mean that you should too…
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