Free Lunch for Yahoo!



The online landscape: Yahoo! wants to spread some cheer to Internet users around the world. A leading online portal, Yahoo! draws people to its network of Web sites with a mix of news, entertainment, and shopping, as well the revitalized Bing search engine (powered by Microsoft). The company also offers registered users personalized Web pages, e-mail, and message boards. Yahoo! publishes content in some 30 languages. It generates most of its revenue through advertising and online marketing sales, but it also charges fees for premium services to some 10 m users. Yahoo! offers broadband Internet access through partnerships with telecommunications firms. In 2008 Yahoo! rejected Microsoft’s unsolicited buyout offer. A pioneer in Internet search and navigation, Yahoo!’s ever-growing collection of content and services has made it one of the best-known online brands and one of the most popular Internet destinations; however, it is facing intense competition as the Internet has increasingly become a major channel for people to communicate and receive news, information, and entertainment. Google is capitalizing on its position as the most popular search engine to rapidly expand its range of content and services, while Microsoft’s MSN portal has launched its own search engine technology and search-targeted ad capabilities. Other sources of competition include increasingly popular sites MySpace and Facebook, which take a large share of the Internet’s advertising revenues.

Businesses: Yahoo! activities are grouped in six categories of online offerings, which include Search; Audience (content offerings such as Yahoo! News and Yahoo! Sports); Communications (e-mail and messenger services); Communities (groups and photo sharing site Flickr); Front Doors (toolbars and navigation); and Connected Life (mobile, co-branded broadband, digital home, and PC desktop services).

Yahoo Key Financial Information: From annual report 2008. COE, COC, WACC estimated.

A.        CORE BUSINESS:

1.       What business is Yahoo! in: The Company contests that their core business is Internet Search and Online Advertising – they being pioneers in the field. However, market research suggests otherwise. A look at market shares for Search, Advertising and Email shows that Yahoo does excellent in eMail while performs poorly in Search Engine technology and in Online Advertising – two businesses it considers to be as “core businesses”. Yahoo! has 30% of the market in eMail and amongst the Yahoo! portfolio of services; Yahoo! eMail is the major volume driver [c.f. Exhibits 1, 2]. Yahoo email, however, is growing at 1.2% in revenues yoy, owing to the major competitors – Windows Live eMail and Gmail.

It is here – in the sheer volume of subscribers in eMail that Yahoo’s core business is. So to grow its core business Yahoo! should consider generating revenue and growing primarily out of its eMail & messaging services.

Yahoo’s reckless acquisition history [c.f. Exhibit 3] shows that they acquired so many companies with neither any focus nor any relation to their core business. Although the business grew by acquisitions whilst adding more and more service offerings to users, when Yahoo! started making losses, it had to close down its services like Geocities (website building), Briefcase (online storage) etc. which cost them a hugely faithful subscriber base – all of this was what Google took advantage of.

2.         Key Marketing capabilities: What differentiates Yahoo from other eMail services is the speed at which they can market their changes and updates to existing platforms. Yahoo started an online bookmarking service called Yahoo! Buzz, which gained third highest position in social bookmarking, just after Facebook and Digg, within a period of 8 months! This speed, with which their popular services will get adopted by the market are a clear indication of how loyal their subscribers are. It is proved that any new step by Yahoo! is embraced very fast by its users. Yahoo! Mail accounts for 36.71% of its users – out of which paid eMail service is more than 63%. Operational capabilities in an online business are a level playing field. Yahoo! just like other eMail giants has the latest technology and people to implement new services and modify and upgrade existing ones. So the differentiating capabilities for Yahoo! are really their huge number of users and social capabilities.

3.         Yahoo! can leverage its loyal customers to grow its core business in three distinct marketing strategies:

A.        Email Search: One of the most valued features in eMail inbox is searching through the tons of email. Yahoo! inbox search is very clearly superior to its closest competitor, Gmail. Owing to this advertising through its own speedy network of subscribe, Yahoo! will generate additional 14% growth coming in from the new customers who register for Gmail. Since these new customers will largely be free subscribers, only a very small percentage will be prepared to pay for a premium email service. The company’s revenues will increase by about $400 m, but the market capitalization will not increase significantly, since this is a core-business growth opportunity. Note that the investors believe more in the power of relative growth when it comes to Yahoo! rather than its cash flow numbers (RVG = 3.475).

B.         Make the eMail inbox a “social” inbox: Yahoo should upgrade its eMail inbox to compete with Gmail’s only advantage – threaded eMails. Yahoo made a bid to buy Twitter and Facebook both, but failed. By the acquisition of a social service like Twitter – Yahoo will leverage an additional 7% growth in its email business – taking its share from 36% to 43% among which paid subscribers will be around 65% (from the existing 63%). This will increase the revenues by about $800 m and the market cap by about $2.8 billion.

C.         EMail switching application: According to researchers most eMail users are averse to switching from one eMail client to another due to the incompatibility and hassle required to synchronize contacts, calendar etc. Owing to this finding, Gmail introduced an “Import” feature for their eMail, which enables users from say, Yahoo! to import their eMail and contacts directly into Gmail. Yahoo! mail has no such feature. To grow its core business of eMail successfully, it has to make sure that it offers the service to existing eMail users, not from scratch but from where they already are on the experience curve. This can be done if Yahoo! introduces this feature that seamlessly imports other eMail and related content into one’s Yahoo! account. By doing this, Yahoo! is estimated to grow its eMail market share to about 40% (from 30%). Out of this increase of 10%, about 1% users will prefer premium services. Thus the revenue will grow by about $83 m, and the market cap will grow by about $290 m.

B.         RELATED PRODUCT/SERVICE(S):

1.         Online Collaboration tool: Google Wave – an online collaboration tool by Google was launched on 22nd July, 2009. It is now matching 3.8 m posts (“waves”) a day – which is near the total number of “tweets” on twitter in a day. Total number of twitter users is projected to be around 9 m at the end of 2009. Matching this rate, Google Wave is growing at 39% – a rate almost seven times faster than twitter! Yahoo should take advantage of this segmented market that Google has already created – users who want an online collaboration tool. Note that before Google Wave, there was Google Docs – which was not so popular in the face of third party online collaboration tools. If such a service is launched by Yahoo! and integrated with the email services, the service will grow at an estimated 20%, with a majority of the users coming from Yahoo! mail. A premium service charged even 50% less than premium eMail (@ $2/month), this will generate a margin 1.4 times that of existing core business. The incremental yoy revenue growth for this service will be about 3% (about $100 m) with an increase in market cap of about $500 m. A projected growth rate of market cap yoy, for the next five years, (given 1% yoy growth in Yahoo’s core business), is about 1.7%.

2.         Operational and marketing capabilities needed: Yahoo already has the infrastructure and tacit information in designing the tool, which has come from past acquisitions and recruiting. Yahoo can really leverage the concept of “viral marketing”, owing to its huge customer base. This marketing capability is cheap, effective and speedier. Using an “invite-only” format for the release of this new service, competitor email’s users will feel a lack of such a service in their eMail provider – especially Windows Live eMail, and this will give Yahoo an edge in the technology.

C.        ALTOGETHER NEW PRODUCT/SERVICE(S):

1.         Yahoo! Smartphone: Sony was among the laggards when it came to adopt the smartphone technology. This is because Sony have been losing market share to the iPhone, Google Android and other HTC smartphones that have taken the market by the storm. From Yahoo’s perspective – the introduction of the Sony smartphone was a missed opportunity. Just like Google partnered with HTC by releasing its own operating system, Yahoo should have partnered with Sony to release a Yahoo! customized phone. Even now the smartphone market is getting fragmented and growing yoy at 4%. Analysts see cheaper models boosting growth upto 7% in the next 3 years. Given the existing share of yahoo email as 30.6% and the smartphone market getting fragmented and growing, a Yahoo! customized smartphone will be a product with no entrenched competition. (Note that the Google smartphone was not targeted towards wooing audience to use Gmail, but existing Gmail customers to buy the Google smartphone rather than competing iPhone etc.) For yahoo this would mean a share of 2% in the smartphone market with incremental revenue of $1 billion per year. Since this will provide Yahoo! immense opportunity to grow, it will result in a market cap increase of about $3 billion, a 2.7% yoy growth, for the next 5 years.

2.         Operational and marketing capabilities needed: Yahoo! will need operational capabilities in the form of having their own operating system for the smartphone. They can partner with smartphone manufacturers like HTC. To avoid the recent takeover by Microsoft, Yahoo! had to partner with rival Google. Similarly, they could leverage the existing Google product – the android operating system, to be used on their smartphones. Since, with this offering Yahoo! will be introducing a completely new product, they will need to extensively tap their existing online advertising network to market their product. In addition, they will need to market the same in communication channels that competing products use, e.g. television, social networks etc.

D.        RELATED MARKET/CUSTOMERS:

1.         Consolidation into a Travel Agency: According to the Department of Commerce, the U.S. travel and tourism industry is the nation’s third largest retail industry. Revenues from travel have increased approximately 100% in the last decade with U.S. travel agencies producing over $100 billion in revenues each year. About 40% of this revenue is made online and the industry is growing at 5% every year. Yahoo! offers its users fragmented services like Yahoo! Maps, Yahoo! Travel, Yahoo! Locals etc. Yahoo should consolidate these free services into a business that acts like a travel agency. Owing to the large number of users, people will be ready to pay for this service especially given the credibility that comes with the existing services. Usually, online travel agents charge competitive prices, and the industry is largely price-dominated. Yahoo! can take advantage of the fragmented nature of the industry, with no entrenched competition and leverage its huge customer base to make this spinoff a success within a short time. At its introduction Yahoo! will be able to capture at least 50% of the existing subscriber base that already use the seemingly unrelated travel services offered by Yahoo! It is estimated that this business will increase Yahoo’s revenues by about $3 billion, with an yoy growth rate of around 9%. The market cap will increase by about $5.2 billion.

2.         Operational and marketing capabilities needed: This large spinoff will require that Yahoo! does very good research into its subscriber base, their travel habits and what competing online travel services they use. The key operational capability needed is to dig into the data culled from this heap of travel information that is socially generated by Yahoo! users on Y! Maps, Y! Locals and Y! Travel and use it to provide tailor-made travel plans and solutions. Currently Y! Travel is an isolated service where even the users cannot see their “contacts’” whereabouts. However integration with Y! Locals will enable it to provide service similar to “tweeting my location”, which was the top application downloaded on the iPhone last year (2008). Since this is a tailored solution and requires significant operational capabilities – it is imperative that Yahoo! starts to market this well in advance – by asking the customers itself about the product. Thus the key marketing capability they will need is surveying the customers and feasibility studies.

E.         ALTOGETHER NEW MARKET/CUSTOMERS:

1.         Developing applications for institutions/businesses: The Yahoo! web portal has over 100 applications that users can add to their own profiles. This is a clear indication that Yahoo! possesses the capabilities to make third-party applications for various uses. Yahoo! must leverage this capability to target a new segment that has a fragmented nature with no entrenched competition – tailored applications for businesses and institutions. As an example, different educational institutions use different means for their internal communication; Blackboard & Lotus Notes (IBM), First Class (connecting to LearnLink), CMail (a Gmail interface tailored to Cornell University students, a $129 installation/PC + storage fee based on space requirements) and so on. There is a huge opportunity for Yahoo! at the “bottom of the pyramid” of smaller educational institutions and small businesses to provide them with tailored solutions to their requirements. This is an untapped market and is very likely to remain loyal to such a product for the long term – due to enormous complexity of shifting from one system to another, in terms of implementation. If Yahoo!  develops such a service for a medium tier business/institution they can increase their revenues by about $40 m yoy. This strategy, however will have negligible impact on the growth of market capitalization in the short term as it is a niche market and so it will require time for the shareholders to see the value of growth in this market.

2.         Operational and marketing capabilities needed: Yahoo! will need to invest very little, in the development of these kinds of services. However, a major investment will have to be on after-sales service of the product. The key issue will be marketing. Yahoo! will have to engage on a personal level with its target customers, to gain the initial approval of implementing the technology across the organization. For this it is critical to target the customer base of the institution (e.g. students in a university). It will be easy for Yahoo! to exploit the absence of competition in small institutions and businesses. Also it is a critical area where support is important considering that the reputation of such a product will spread very fast among the target segment.

F.         RELATED PRODUCT/RELATED MARKET

1.         Yahoo! Operating System: This is a long-run growth strategy. Even when Windows is the leading operating system in the OS market, Linux – an open source OS was able to take a majority of the Server market from windows. Google has already announced its operating system for the PC – Google Chrome OS. This is a prophetic trend that people, in the face of cheaper technology are not afraid to give newer OS a try. The newest operating system by Microsoft, Windows 7, has about 4% of the market share. The biggest selling point of a newer OS is that Windows was incorporated in a world where the internet was not heard of, so the underlying principles of Windows remain obsolete. This point can be leveraged by Yahoo! OS in the long run and combined with a partnership with a PC manufacturer; Yahoo! can grab a significant share in the OS market – about 1% which will amount to an increase in revenues of about $2B, at the time of release, and an increase in market cap of about $6B. Note that this strategy is different in nature from the short-term Smartphone strategy [C] which is more targeted towards existing Yahoo! users.

2.         Operational and marketing capabilities needed: Yahoo! will need tremendous operational capability for this development and very less marketing capability till the time of launch. Yahoo must keep developing these capabilities while the market giants like Google and Microsoft fight it out. Yahoo! must only release the version for PC as the PC industry is not averse anymore to experimentation. This will establish Yahoo’s position in the OS market and owing to the size of the market, every percentage point of market share amounts to a lot of margin.

SUMMARY OF MARKETING GROWTH STRATEGIES:

Non-Core Business

Exhibit 3: Yahoo! Acquisition History

  • March 1995: Yahoo is incorporated.
  • October 8, 1997: Yahoo! acquires Four11
  • June 8, 1998: Yahoo acquires Viaweb, co-founded by Paul Graham, which becomes Yahoo Store.
  • October 12, 1998: Yahoo acquires direct marketing company Yoyodyne Entertainment, Inc.
  • January 28, 1999: Yahoo acquires Geocities.
  • April 1, 1999: Yahoo acquires Broadcast.com.
  • June 28, 2000: Yahoo acquires eGroups.
  • October 2001: Yahoo! acquires Australian online auction site Sold.com from Fairfax Media for $30 m
  • January 22, 2001: Yahoo! acquires Hotjobs for $436 m
  • December 2002: Yahoo Inc. starts acquisition of Inktomi Web search engine
  • July 2003, Yahoo acquires Overture Services, Inc.
  • March 25, 2004: Yahoo acquires the European shopping search engine Kelkoo.
  • July 9, 2004 Yahoo acquires email provider Oddpost.[7]
  • November 4, 2004: Yahoo acquires game platform provider Stadeon.
  • February 9, 2005 Yahoo Launch is changed to Yahoo Music, which still provides free music.
  • March 20, 2005 Yahoo acquires photo sharing service Flickr.
  • March 29, 2005 Yahoo launch blogging and social networking service Yahoo! 360°
  • June 14, 2005 Yahoo acquires VoIP provider DialPad Communications.
  • July 25, 2005 Yahoo acquires widget engine Konfabulator
  • August 11, 2005 Yahoo acquires 40% of Alibaba.com for $1 billion US, and Alibaba will take over operation of Yahoo China.[10]
  • August 23, 2005: Verizon and Yahoo Launch Integrated DSL Service
  • October 4, 2005 Yahoo purchases online social event calendar Upcoming.org.
  • October 17, 2005 Yahoo buys British company Whereonearth Ltd which provides location technology.
  • December 9, 2005 Yahoo acquires del.icio.us.
  • January 9, 2006 Yahoo acquires webjay
  • January 2006: Yahoo! announces 50:50 joint venture in Australia with the Seven Network, called Yahoo!7. Official Site
  • September 27, 2006 Yahoo acquires online video editing site Jumpcut.
  • January 8, 2007 Yahoo acquires MyBlogLog.
  • March 2007: Yahoo! acquires Taiwan blogging site wretch.cc
  • April 30, 2007 Yahoo! announces acquisition of Right Media.
  • June 20, 2007 Yahoo! agrees to acquire Rivals.com.
  • July 18, 2007 Yahoo acquires 35% stake in an Indian online ad company Tyroo Media Pvt ltd.
  • September 4, 2007 Yahoo announces acquisition of BlueLithium, a company founded by industry pioneer Gurbaksh Chahal
  • February 4, 2008 Yahoo! Acquires FoxyTunes
  • February 4, 2008 Yahoo! and Rhapsody Announce Strategic Partnership In Digital Music.
  • February 12, 2008 Yahoo! Acquires Maven Networks, Inc.
  • February 12, 2008 Yahoo! and T-Mobile Agree to Enter Into Strategic Partnership.
  • August 2008: Yahoo! acquires Taiwan ecommerce site Monday.com.tw
  • July 2009: Yahoo! acquires Xoopit.
  • August 2009: Yahoo! acquires Maktoob.com



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