Yahoo for Yahoo

The new economy is alive and well. Long live the new economy!

hen Terry S. Semel took over as chief executive of Yahoo two years ago, a crucial part of his turnaround plan was to diversify the company, the big Internet portal, away from online advertising and into other services that relied on paying users. The turnaround is going quite nicely. Yesterday, Yahoo said that its third-quarter profit more than doubled. But the biggest and the fastest-growing driver of revenue and profit has been advertising, not fees.

Indeed, on Tuesday, Yahoo completed its $1.6 billion acquisition of Overture Services, a leader in the fastest-growing segment of Internet advertising, text advertisements displayed with World Wide Web search results. "When I first came to Yahoo, advertising was a one-trick pony: branded advertising," like banner ads, Mr. Semel said yesterday. "We have a much more expansive way of looking at advertising today." That includes ads with pictures, used by big companies, and the text ads, used mostly by smaller businesses.

In the third quarter, branded advertising increased 20 percent, the company said, and search advertising doubled. Mark Zadell, an analyst with Blaylock & Partners, said the rebound in branded advertising was, in many ways, the bigger surprise. "It shows that the adoption of the Internet as an advertising vehicle by traditional advertisers is truly taking place," Mr. Zadell said. In many ways, the acquisition of Overture, and Yahoo's earlier acquisition of Inktomi, a Web search technology company, bring Yahoo back to its first service, as an index of Web pages. The market is growing rapidly as businesses see positive results from search-related ads.

But Yahoo continues to lose market share to Google, which handled 32 percent of the search traffic in August, compared with 26 percent for Yahoo, according to comScore Networks, a research firm. In January, Yahoo was the top search site, with 29 percent of the traffic, ahead of Google's 27 percent. Mr. Semel said that over the next year, Yahoo would create search products, based on its acquisitions, that would better capitalize on its advantages over Google.

"Search will become more important for Yahoo," Mr. Semel said. "It will allow us to do new things, like the improvements to Yahoo shopping." Yahoo recently expanded its shopping service, using Inktomi technology, to include a search of products offered by anyone on the Web, a response to Froogle, a similar service offered by Google. Previously, Yahoo displayed only products offered by advertisers. Over all, Yahoo earned $65.3 million in the third quarter, up 126 percent from a year earlier. In the recent quarter, Yahoo earned 10 cents a share, a penny more than analysts expected.

The company's revenue was $356.8 million, up 43 percent. The company's profit grew far faster than its revenue, largely because its costs increased only 25 percent. The fastest-growing segment was what it calls marketing services — essentially advertising — with revenue of $245.1 million, up 48 percent. Yahoo's revenue from fee-based services was $79.4 million, a 38 percent increase. Yahoo said it now has 4.2 million paying customers, up 700,000 in the quarter, more than expected. It now expects to have more than five million customers at year-end.

The biggest growth in this area is from Yahoo's Internet access service, provided through SBC Communications in the United States. Yahoo has just started a similar service with the BT Group in Britain. Yahoo has also had growth in online personal ads, paid e-mail services and fantasy sports services. But many other types of service it has talked about offering have not worked or not been introduced. Mr. Semel, a former co-chief of the Warner Brothers studio, has been interested in video content, but Yahoo's experiments in this area have yet to produce a successful service.
Source: New York Times
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