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Yahoo’s growth options dwindling July 25, 2011

Posted by David Card in Uncategorized.
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Yahoo reported another disappointing quarter, with ex-TAC revenues (i.e., revenues minus the money it shares with ad network partners) down 5 percent, to just over $1 billion. Its core display advertising business was up 5 percent, but it appears to be losing share to companies like Google and Facebook. Yahoo is still one of the biggest online properties in the U.S., with fairly sturdy content and communications assets, but its options for restoring growth are getting fewer.

The reason? Yahoo has missed the most important new digital consumer trends. It might still have a shot at adding social media; after all, after many failures, Google’s Google+ project to add social elements to its services appears to be gaining traction, at least among early adopters. But Yahoo failed to translate a solid position in casual gaming into social gaming, and it is only dabbling in social commerce, even though it coined the phrase. And its acquisition of “content farm” Associated Content doesn’t seem to be increasing profitable traffic. Meanwhile, outsourcing its search business to Microsoft hasn’t paid off yet. So what is the company to do?

Yahoo blamed its display-ad sluggishness on a sales re-org that delayed some big deals. Let’s give Yahoo the benefit of the doubt and assume it still has good relationships with big-brand advertisers like GMC, Visa and Target (all of which are serving up rich media ads or sponsorships on Yahoo as I write this). If Yahoo cashed out its assets in China, it could use that money for other acquisitions and investments to bolster online advertising and gain a little social media momentum.

Yahoo already has a decent number of online video viewers – it’s a distant No. 3 after YouTube – but it is relatively weak in how much time those users spend with its content (35 minutes per viewer compared with Hulu’s 185, according to comScore). Buying Hulu might be too expensive: Apple and Google are rumored to be interested, and Hulu may not get long-term exclusive contracts for TV shows. But Yahoo’s brand-advertising expertise is still better than Hulu’s, or Netflix’s or Amazon’s. Its IntoNow TV check-in acquisition is already focused on synching twin-screen activities with on-air ads, and Yahoo Connected TV is showing signs of life. Yahoo could make a compelling social TV pitch to advertisers like Coke and Verizon, for example, connecting an on-air ad to an on-screen or PC-based check-in or other activity.

Yahoo could try to be the social-media advertising marketplace for everybody but Facebook. Even a social network as big as Twitter needs help creating and selling ads. If Yahoo didn’t choose to acquire a real-time ad network like OneRiot or 140 Proof that places ads near social streams, it could still bulk up its social targeting and analytics via Lotame, 33Across or Media6Degrees. With some acquisitions and integration, Yahoo could ease the effort a publisher or ad buyer has to make to cobble together customized solutions.

Yahoo is reportedly working on a hybrid content/ad syndication network. Instead of just renting out ad space, a second-tier online publisher could get related personalized content and advertising from Yahoo in a single package. Yahoo has plenty of high-quality content, and it could make Associated Content create advertorial-like opportunities. Newspaper publisher Gannett attributed a solid online quarter partly to its ad network partnership with Yahoo, proving that Yahoo has some success dealing with quasi-competitors.

With some effort, Yahoo could reenergize its business around video, a social advertising network and/or syndication over the next 9 to 18 months. Its costs are under control and its ad business is growing, albeit slowly. If investors or its board don’t have the patience, I suppose it could try to sell itself to Microsoft or AOL, assuming they’re still interested. Either would be a pure consolidation play among general-purpose content portals, combining audiences, tech infrastructure and sales forces. That kind of cost-savings merger is always brutal, and brutally difficult to execute.

Question of the week

How can Yahoo start growing again?
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Don’t relax, Google. Integrate July 18, 2011

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Google is on a tear. It just had a great quarter (revenues up 32 percent to a record $9 billion), 550,000 Android devices are activating daily, and with Google+ it finally has a social product generating positive buzz and attracting users (10 million in limited release). CEO Larry Page is pleased with the progress of Google’s reorganization around product-oriented business units. But Page can’t just sit back and let those business units go their merry ways. Google faces key challenges to the growth of its core search and advertising businesses that it could address with better product integration.

For all the talk of search-quality problems and threats from social search, Google still dominates the market with a 65 percent share. But there are worrying signs. U.S search query volume is pretty flat. And while Google’s paid clicks were up 18 percent in the second quarter, that’s slower than revenue growth and actually down from Q1. Google’s average price per click growth was also a little sluggish, at 12 percent.

Sales VP Susan Wojcicki said on the quarterly earnings call this week that the primary growth drivers of paid search are query volume and Google’s ability to deliver better-quality results. But Google conceded that one of its key quality initiatives had actually hurt revenues a bit by featuring sites that weren’t advertisers — its Panda algorithm tweaks, which aimed to diminish the influence of content farms. Over time, improving relevance will pay off in user loyalty and more clicks. Meanwhile more improvements to results formats would get paid click rates up.

Getting deeper into display

Google needs more higher-priced display ads so that it can make better integrated use of the valuable data it gleans from search to create accurate display targeting. Google doesn’t break out display-ad revenues in its financial reporting, and you’ll get different estimates of its size. But the company has two components to its display business: an ad network selling mostly low-cost ads on third-party sites and the advertising it sells on its own properties like YouTube and Gmail.

The real money is in owning the pages that show ads, as Google’s ad networks keep only about 30 percent of the sale. On the call, Google ducked a question on whether it needed more “owned and operated” ad inventory: The answer is that it does. YouTube is getting more aggressive in advertising experiments like its skippable ads (which already compose a third of inventory, according to Wojcicki) and in pushing pricey sponsorships. But Google hasn’t said anything about advertising on Google+, which might be its next big source of page views. It is promising Google+ company pages, but it likely won’t charge for them, because archrival Facebook doesn’t. It needs to integrate Google+ inventory into its ad networks, so it can make money selling ads that drive traffic to company pages, just like Facebook does.

Connecting some more dots

Google has an impressive collection of local assets with Maps, search and Offers. But they’re only lightly integrated so far. And adding a one-page sign-up form is no substitute for having a local sales force that could package search, display, offers and analytics for marketing-challenged small businesses in a way that no other company could match.

While Google brags about Chrome’s 160 million users, it has only 12 percent market share. I’ve been dismissive of browsers as technology platforms, but Chrome could do web-wide what Google is doing with its promotional black toolbar on its own sites. That could be a powerful incentive for +1 and Google+ usage.

Don’t get me wrong. Google’s business is in solid shape. But a little more integration would help ensure growth and defend against would-be usurpers. Page pointed at Google’s visual redesign as a cross-group initiative: He just needs a few more of these.

Question of the week

How can Google maintain its growth?

Why music won’t be Facebook’s next billion-dollar business June 27, 2011

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Last week Om broke a big story on Facebook’s plans for music. We’ll likely see more details at Facebook’s upcoming developer conference, but as Om describes it, Facebook’s scheme sounds cool, and music is a natural fit for the dominant social network.

Om described a Facebook music dashboard that will accommodate multiple third-party digital music services from companies like Spotify, enable music streaming while still in Facebook, and incorporate sharing, recommending and syndication technologies like Connect and Like buttons. Such a platform has great promise for increasing Facebook usage, especially since music, unlike video, encourages background listening. A platform like this one also offers potential user lock-in through habitual usage or a third-party music collection locker. And all without Facebook having to do complicated licensing deals with record labels and music publishers.

But it will be tough for the company to cash in big on music for the following reasons:

  • There is a limited subscription market. Facebook probably wants a cut of revenues from digital music partners. But on-demand music services like Rhapsody and Napster have never gotten more than a million subscribers each at $10 to $15 per month prices. Spotify, which needs to sign all the labels before entering the U.S., has a lot of momentum in Europe, but it faces the same tight market. I go into detail in this post, but it will be difficult to convince music fans to change from a model where they mix radio and personally owned music to a rental model. Total, there are probably five to seven million prospective customers.
  • Facebook doesn’t charge rent. Remember the portal tenancy deals AOL used to extort from startups back in the day? Some music startups – I’m talking about you, Spotify – have paid up-front fees (funded by VC firms) to music rights holders, and they might do the same for premium positioning on Facebook. But Facebook has never directly charged its partners for placement or for using its platform, choosing instead to cultivate an ecosystem of companies with Facebook advertising nearby. Apps companies, social games, retailers and brands all get this free ride. And a music “real estate” model wouldn’t be sustainable without big digital music revenues.
  • The margins in music sales are low. Years ago I did analysis that suggested royalties and credit card fees ate up about 85 or 90 cents of a 99-cent single. Like PayPal, prepaid Facebook Credits could cut the credit card costs by a third, but not if Facebook wants its usual 30 percent cut. Albums or bundles of singles can also reduce the impact of per-transaction credit card fees, but they’re not the dominant digital music package.
  • It hasn’t prepared for the best advertising opportunity. The most natural music ad opportunity is in audio ads that play between songs, like in radio. Radio networks (CBS, Clear Channel) and Pandora are working hard on online audio ads, but it’s a small market so far. Facebook could do ad insertion and create an audio ad network, but it would have to start from scratch. But it hasn’t even done anything similar for the much larger display ad opportunity in apps or on its Likes network.

Facebook’s best business opportunities around music build off its existing advertising business. The company is getting smarter about brand advertising; for example, it recently launched an advisory council to better schmooze with brands and agencies. But it hasn’t created any fancy ad formats or sponsorships. Youth marketers like Pepsi, Coke, and Nike would jump on a rich-media sponsorship app that deeply integrated music sharing or listening, like the old My Coke Music. Facebook’s audience would be much bigger.

If any of its music partners can make money, Facebook will no doubt wean them off viral communications that run in its News Feed. Then it could steer them toward complementary advertising, just like it did with social games companies like Zynga. But that’s “if” they make any money.

Question of the week

How can Facebook make money off music?

What the Google-Facebook Battle Is Really About May 16, 2011

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Facebook’s silly scheme to plant anti-Google privacy stories further highlights the bitter rivalry between the two companies, but it also points at what they’re really fighting over. The competition is not so much about each company’s core business — search vs. advertising-powered social networking — as it is about future products and services, and each company’s respective role as a technology platform provider. And potential partners and competitors need to know which battles these two competitors will take seriously so they can adjust their own priorities and investments.

Here are the key areas of competition for Facebook and Google:

  • The “interest graph:” In contrast to a social graph of information about relationships between people, an interest graph based on topics might actually be a better indicator of purchase intent than what friends — who may not have similar tastes — like. Facebook Likes and Google search results feed such a graph — though Twitter may have more easily collectible info here than either.
  • Web navigation: Facebook hasn’t proven it can drive shoppers to commerce sites the way Google can, but it’s becoming an important source of visitors to online media sites like the New York Times, CNN and HuffPo. Consumer platforms depend on habitual use, so Google can’t risk losing ground as an overall web-discovery vehicle.
  • Communications: It’s unlikely social media will completely replace email, but both Google and Facebook are competing to be a user’s unified communications hub by integrating mail, chat and posts with contact lists and presence management. Such a hub would generate constant use and potential customer lock-in, and be a rich source of contact data.
  • Identity management/authentication: Facebook tries to enforce a single, authentic user identity, but it isn’t very good at letting that user manage his relationships between different types of friends or groups. Google does offer a sign-on service, but its Profiles are mostly for search personalization. Authenticated identities could play a big role in payments systems and professional/career relationships.
  • Ad networks: Google ad networks dominate search and are strong in direct-marketing display. In theory, Facebook’s Like network could serve context- and behavior-based advertising on sites web-wide. Facebook’s complaint that Google scrapes social information without explicit permission might be based on potential privacy legislation. One bill under consideration would give companies with formal consumer relationships more freedom to use data for advertising. That would give a company like Facebook an advantage over third-party ad networks.

Build, Buy or License?

Facebook doesn’t seem interested in building a conventional search engine, but Google sure is trying to build out some Facebook-like technologies. Google recently introduced +1, a competitor to Facebook Likes, where users recommend search results, ads and, eventually, web pages. Website owners will no doubt flock to +1 for its potential influence on Google search ranking. But, faced with yet another link-sharing option, users may ignore +1, especially since Google lacks an established equivalent of Facebook’s news feed to display links.

Neither company likes to license technology or data from other companies, with the exception of Facebook’s Microsoft partnership. Google seems to have some arrangement with Facebook that gives it access to Facebook company Pages, but the two have long bickered over sharing contact information.

Since they don’t like partnerships, how about acquisitions? Business Insider has a laundry list for Google, but two are big and might also appeal to Facebook:

  • Twitter: Either company’s ad business could instantly monetize Twitter better than Twitter can itself. But neither may need to buy into Twitter, as it seems pretty easy to get access to Twitter data.
  • LinkedIn: The professional social network is stingier about sharing data, has a working business model and could play an important role in identity authentication. But it’s about to go public, so would-be acquirers would have to act fast.

Question of the week

What are Facebook and Google really fighting over?

Handicapping Facebook’s Next Billion-Dollar Business(es) May 2, 2011

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Amidst reports that it was having trouble unloading $1 billion worth of shares at a very rich valuation, Facebook last week tweaked an existing advertising service and started testing its first home-grown social commerce product: Facebook Deals. Will that be Facebook’s next billion-dollar business? Possibly. But it already faces stiff competition from Groupon and LivingSocial, not to mention a new Google entrant. More importantly, other growth- and revenue-generating opportunities exist that could be worth exploration on the part of Facebook, too.

Let’s examine each of these potential new revenue streams.

Big New Businesses for Facebook

Facebook dominates social media and the advertising spending that surrounds it. The company makes its money from low-priced display advertising (estimated at nearly $2 billion in 2010) and the 30 percent commission it takes from social gaming companies using Facebook Credits for virtual goods (forecast to be $250 million in 2011). Its three best new business opportunities are:

  • Rich-media brand advertising: To get at ad budgets that need more than the low-priced display ads driving social networks, Facebook needs to offer brand advertisers big, rich-media ad units like those of the New York Times and AOL. If it’s worried about user resistance, Facebook could show the ad only once a day, leave it over on the nearly empty right-hand sidebar or even reserve it for Friday movie openings and holiday promotions. Other than Yahoo, Microsoft and AOL, no other site has inventory with the audience reach for this kind of advertising, which commands $30-plus cost-per-thousand pricing and is usually sold out. This one should be a slam dunk.
  • Deals and social commerce: Facebook’s toe is barely in the social commerce water — it’s testing Deals in only five cities, sourcing some of the offers from partners and not charging merchants anything yet. Facebook is differentiating its deals by not demanding they be deeply discounted, and focusing on more social, shared-experience offers like restaurant deals or concert tickets. Local deals require an expensive local sales force that Facebook doesn’t have. While the company can deal directly with national retailers and merchants that target locally — a good opportunity otherwise — most of them don’t make the kind of “shared experience” products mentioned above.
  • Connect-based ad network: Unlike most ad networks, which make do with remnant ad inventory scraped from the bottom of online publishers’ barrels, Facebook has access to ready-made, desirable space through Connect services such as its Like button, sign-on and comments. Even without getting into behavioral targeting, Facebook could show ads targeted by context just like Google’s AdSense network. For example, it could serve up a hotel ad in an online newspaper’s travel section. If publishers balk, and weren’t cowed by their need for the traffic that Likes generate, Facebook could always share a piece of the revenue.

Potential Partnerships

I’ve talked about Facebook’s need for brand advertising and its potential to create an ad network before, and this piece by Jason Calacanis and his Launch team also likes those two opportunities and tries to put a dollar figure on their near-term revenue. He also suggests Facebook do in-stream advertising, which I suspect Facebook would deem too intrusive and competitive with Like messages and other promotions. Other potential revenue streams? Facebook has never charged for company pages (it sells them ads), I’m skeptical that it could do search effectively, and it has been very selective about data licensing.

But it needs partners to tap into the three new businesses identified above. Companies like:

  • Microsoft, already working with Facebook on search, who could build the ad network. These days, however, Microsoft seems focused almost exclusively on search after outsourcing some ad network functions.
  • Gilt Groupe, whose Gilt City deals unit is part of Facebook’s trials. Unlike other deal companies, Gilt also is a retailer, which could open other social-commerce doors.
  • Other online ad technology companies that could help Facebook’s advertising platform. Those that do data mining (e.g., Experian, Audience Science, BlueKai) and social targeting (e.g., Lotame, 33Across, Media6Degrees, Rapleaf) may need to do direct deals with Facebook to accommodate potential privacy legislation.

Question of the week

What will be Facebook’s next billion-dollar business?

Real-Time Advertising: How to Get in Early October 18, 2010

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Even if you don’t believe real-time feeds will become the dominant content consumption paradigm, it’s clear they’re a growing force. Consumer-paid access to real-time feeds is largely constrained to paid mobile apps today, so advertising would appear to be the immediate payoff. With that in mind, let’s look at how social media companies can best cash in.

I haven’t come across a forecast for real-time advertising spending, but it’s a nascent market that’s fairly concentrated: Facebook and Twitter represent the largest audiences. Market researcher eMarketer projects Facebook will collect $1.3 billion in ad revenues globally in 2010; presumably, most of that will be spent on Facebook’s news feed. Twitter is only just beginning to embrace advertising. But clearly, we’re talking about a business that will be measured in billions rather than millions of dollars.

The current audience concentration — and the resulting ad dollars — could diffuse. Already, a lot of tweets get viewed on third-party Twitter clients, as well as on Facebook. Somewhat similarly, Facebook is syndicating its content through initiatives like Facebook Connect and Instant Personalization, as well as arrangements that allow companies like Skype to show Facebook users’ updates and presence within its own application. So it might not be just Facebook and Twitter who can cash in on those audiences.

Could Real-Time Ad Networks Jump-Start Spending?

Advertisers demand a certain scale of audience before they start spending big money. As with other media — social or otherwise — ad networks can alleviate audience fragmentation, giving advertisers access to eyeballs across a number of sites or apps. The big ad networks from AOL, Google, Microsoft or Yahoo aren’t doing anything in the real-time space. Meanwhile, a handful of startups have emerged. That includes 140 Proof and OneRiot, who sell inventory on Twitter clients and apps, as well as Tweetup, which also makes its own destination site. Ad.ly will construct celebrity-sponsored updates and insert them in Twitter and Facebook streams.

I spent some time with OneRiot this week; its experiences are good indicators of the state of the real-time ad marketplace:

  • Tapping test budgets. OneRiot’s business is divided evenly between publishers (New York Times, ESPN, Guardian) who are promoting its stories or marketing their apps in feeds and more traditional marketers like Zappos and Stella Artois. OneRiot is getting part of the test budget of bigger campaigns, so advertisers are only spending tens of thousands of dollars with it. The company can charge 12 to 25 cents for click-throughs, or $2 to $3 CPMs.
  • Relatively simple targeting. OneRiot usually sells an audience type rather than target by demographic or content context. Its analysis shows that Twitter client users are a highly engaged audience; when they click through to a story or site, they’re likely to hang around twice as long, generating 7 or 8 pageviews.
  • Ad format experiments. OneRiot serves up text ads that look like search engine marketing, but its architecture can handle banners and richer formats. It says some advertisers have experimented with dynamic content that is contextually related and inserted into the text creative.

Ad Network Realities

Right now, the ad networks in real-time are ahead of most of the feed sites in sophistication, and could help move the market forward. But in most media markets, it’s the company with the eyeballs that commands the vast majority of ad spending. Not long ago, observers who probably over-interpreted Google’s success thought online ad networks could reverse this. But that hasn’t turned out to be the case.

Publishers and other content companies like to hold onto the best ad inventory and sell it directly to their best advertisers and ad agency clients. That leaves low-priced remnant inventory for the networks. NBC dropped Google’s TV ad network recently; Microsoft is shutting down its in-game ad network because its biggest customer, Electronic Arts, pulled the business in-house.

As with other media, the real-time ad network ecosystem will have to deliver targeting and measurement to capture advertiser spending. Companies like Klout and Gravity may help marketers identify influencer audiences. Kantar Media, a unit of ad agency holding company WPP, tracks offers competitive intelligence on ad networks, but hasn’t aimed at the real-time space yet.

Related Research: Social Media in the Enterprise

Question of the week

Could ad networks accelerate real-time advertising?

Could a Social Strategy Save Yahoo? October 4, 2010

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The turmoil at Yahoo may be reaching crisis proportions. Stagnant sales growth was one thing, a lack of strategic clarity another. And now, senior executives are leaving in droves and there are calls for drastic action that include merging with AOL immediately.

But could a healthy dose of social networking be the cure to what ails Yahoo?

Possibly. The search giant appears to be missing out on social and mobile, the current twin drivers of consumer tech. I’ll leave mobile for another analyst, but here’s how Yahoo could gain some momentum in social media.

Recognizing Yahoo’s Assets

A prime reason for Yahoo’s social sluggishness was its inability to integrate its existing assets with a social flavor: Flickr, Delicious, Answers and its communications products like Mail and Messenger. These properties could still be put to use, but what are truly Yahoo’s powerful assets?

  • A large, loyal audience. According to Compete, Yahoo’s still in the top three in terms of online audience reach and user time on its sites. And as recently as a year ago, it was still consumers’ second-favorite online brand, behind Google.
  • Leading content and communication properties. Yahoo has leadership positions in important, ad-friendly online content categories like news, sports, women’s content and entertainment, as well as those communications services, according to Compete data.
  • Advertising expertise. Yahoo is a leader in online display advertising and has a large, experienced ad sales force with solid relationships at agencies and advertisers. Yahoo is especially good — for an online media company, at least — at brand advertising.

Building Out the Feed

Just about every company online should add some social spice to its site, but in Yahoo’s case, an aggressive dose could help the company maintain its huge audience and advertising leadership position. It’s too late for Yahoo to build a new social network from scratch. Rather, Yahoo should try to regain the momentum of its original portal role as the entry point or start page for the Internet by playing an aggressive role in the emerging age of feed-based user interfaces.

  • Integrated interface. Yahoo should continue and accelerate its feed and update aggregation strategy, but move it beyond just surfacing connections on the homepage or near content and email. Once upon a time, along with AOL, Yahoo taught mainstream users how to use directories and search for web navigation. Now it must more aggressively offer a feed to its audience — one that may be more familiar with traditional, search-heavy ways of  content discovery. Facebook is mainstream, but Twitter is not. Yahoo could help move mainstream audiences back and forth across search, browse, and stream consumption styles. A medium-size acquisition, say, TweetDeck or Seesmic, could help.
  • Ads around feeds. Yahoo should then apply its content, relationships and targeting capabilities atop or near the resulting UIs and experiences to create unique “advertorial” around that aggregation. Yahoo’s content farm acquisition, Associated Content, can work here, too, in addition to creating SEO bait. Yahoo has long worked with creating customized content experiences for brand advertisers and promoting marketing case studies and benchmarks.
  • Social ad network. Yahoo’s already in the ad network business (although there is concern about its publisher efforts) and it should rent out its resulting social ad platform to other sites. Most social media startups can barely spell “advertising” and might welcome the assistance. True, Facebook is already building out an ad platform with social targeting and a home for advertiser content. But it doesn’t have the richer store of seasonal and evergreen professional content that Yahoo has, nor its trusted content brand. And Facebook says it’s not building an ad network. At least not yet.

Related Research: Four Lessons From Yahoo’s Slow Demise

Question of the week

How could Yahoo use social media to get its mojo back?