Yahoo Under Repair

In January, during Yahoo (YHOO)'s most recent earnings call, President Jeff Mallett singled out FinanceVision as a point of light in an otherwise dark forecast. FinanceVision, a 10-month-old experimental financial news network, is located deep inside the company's Santa Clara, Calif., headquarters. Only when you reach a small clearing in a maze of cubicles that serves as FinanceVision's nerve center do you realize how small it all is.

It's obvious that Yahoo hasn't invested very heavily in this part-time CNBC knockoff that broadcasts news and commentary live over the Web. When asked in October how many people are working on the network, executive producer Eric Scholl swept his arm to indicate the 10 or so desks in the clearing and said, "This is it." And it clearly isn't enough to help Yahoo through its current woes.

After appearing almost invincible in the midst of the crumbling dot-com economy, Yahoo, arguably the mightiest Internet pure-play of them all, announced that it expects to take a big hit in earnings this year. The bad news raises questions about the long-term survival of even the strongest Internet brands, but it hardly comes as a surprise. A company that last year relied on a single source - advertising - for 90 percent of its revenues is bound to run into problems in tougher economic times. Yahoo has dabbled in a number of smaller projects that would help it diversify its revenue stream but never with the urgency required to capture a new market. The company remains largely a one-legged stool.

Through most of its life as a public entity, Yahoo was a success story, the Internet's most remarkable child prodigy. The portal has consistently shown a profit since the fourth quarter of 1996, making its stock one of the few pure Internet plays many institutional investors would buy - an Internet blue chip. According to Media Metrix, Yahoo reigns as the world's second-most-visited portal behind America Online, an accomplishment that has placed the company at the very center of the Internet Economy. Even as the dot-com advertising market tanked last year, Yahoo's brand remained solid, attracting an impressive amount of advertising from traditional retailers.

Yet not even Yahoo could maintain its momentum forever. In January, the company announced that while it expects a modest rise in revenues, profits will fall 10 percent to 30 percent, short of the 18 percent growth that analysts had expected. The company's stock has dropped 84 percent from last year's high, as if Yahoo is nothing but a niche b-to-b company with a suspect future. Its largest rival, America Online, is now part of the behemoth AOL Time Warner (AOL), which combines the country's most popular online property with Time Warner's content and extensive cable network. Not surprisingly, the Wall Street rumor mill is working overtime, casting Yahoo as a tarnished but still valuable Web jewel ready to be added to the crown of some mainstream media firm.

No one is counting out Yahoo yet. But the question looms whether this giant, like IBM (IBM) and Microsoft (MSFT) before it, has seen its day in the sun. The mighty Yahoo now seems like so many other Internet companies in search of reliable new revenue sources in highly competitive markets. Over the past two years, fat and happy Yahoo dabbled with projects such as FinanceVision. Now the company must get serious about diversifying its business if it hopes to regain its mantle as the bluest of Internet blue chips. The question is whether it's too late.

Yahoo has always been an advertising story, and until recently it's been a damn good one. The pitch back in 1995, advanced by Yahoo and every other Internet company skilled at attracting users but not necessarily revenues, was that the portal was like the early pioneers of television. Just as advertisers spent billions a year to broadcast their message to TV viewers, they'd spend billions to reach the visitors drawn to a particular Web site. Yahoo, with $1.1 billion in revenues last year, was the first company to prove that a business could be built primarily on online advertising.

As Yahoo's brand grew, inking an advertising pact with the portal was a sign that a dot-com had arrived. The reasoning was pure Internet: Cutting a deal with Yahoo wasn't about advertising a product or a service to consumers so much as advertising your existence to venture capitalists. A company can buy a banner ad on Yahoo, sponsor a section of the site or buy "placement," which allows businesses to target ads to people based on their keyword searches. Yahoo's "anchor tenancy" deals let companies set up shop in the portal's online shopping mall, which translates into advertising revenues and commissions for Yahoo.

By 1999, so many would-be customers were flocking to Yahoo that the company's representatives barely had to pick up the phones. Of the roughly $8 billion spent on online advertising last year (a figure just shy of the total dollars devoted to ads on cable TV), Yahoo grabbed one out of every eight dollars. The demand for space on its site meant that Yahoo could be unyielding on price and other terms. The company dictated where an ad would appear on its site and even wrangled over who owned the behavioral data generated by tracking a visitor's movement after clicking on an ad. At its height, the stock for the 6-year-old company was trading at more than 1,000 times earnings.