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Losing faith in Yahoo (again)

An expected slowdown in online display advertising next year spells trouble for the struggling Internet company.

By Yi-Wyn Yen, reporter
October 9, 2008: 7:21 AM ET

Yahoo's shares have fallen more than 50% below the $33 that Microsoft offered to pay for the Internet company earlier this year.

SAN FRANCISCO (Fortune) -- No tech company that relies on web-based advertising is immune to the global credit crisis, but few are as exposed to the economic meltdown as Yahoo.

Analysts expect that worsening conditions will slow down spending for online display advertising in 2009. This week three Wall Street analysts cut their price targets for Yahoo (YHOO, Fortune 500), which makes the bulk of its money from selling graphical ads on its web properties.

"This is bad news for Yahoo," says David Hallerman, an Internet analyst for eMarketer. "Economic factors will push display ad spending down."

Yahoo spokeswoman Kim Rubey says the company is unavailable to comment on financial matters until after its earnings report on Oct. 21.

Yahoo has given investors little reason to cheer. Its stock has fallen below $14 for the first time in more than five years. That's a far cry from a few months ago when Microsoft (MSFT, Fortune 500) was willing to buy the Internet portal for $33-a-share. While shareholders say they don't blame Yahoo for macroeconomic conditions that are hurting stock prices for most tech giants, the situation certainly doesn't help the company.

Investors say they are tired of waiting for Yahoo to turn around the company and have less faith that it will be able to do that given grim economic forecasts for '09. Rumors that Yahoo has renewed talks to team up with AOL don't seem to have helped. (Fortune and AOL are both owned by Time Warner (TWX, Fortune 500).)

"The Yahoo story is hard," says Chris Boova, an investment officer at J. & W. Seligman. "There's a bit of fatigue from investors. I don't get as many phone calls from the sell-side community asking about Yahoo."

"I'm a tech generalist," he adds. "I have a lot of opportunities to invest in other stocks with less drama and easily understandable stories."

The New York-based fund was a top-25 holder of Yahoo four months ago, but J. & W. now has a minor stake after dumping 8.6 million shares in the second quarter.

Pull back in display ad spending is troubling for Yahoo. Display ads account for 62% of Yahoo's net U.S. revenues, according to eMarketer. Already, Yahoo's growth rate is less than that of the U.S. online ad market. In the first half of 2008, U.S. net revenue for Yahoo grew 11% from the same period a year ago compared to 15.2% for the overall market for Internet ad revenue, according to the Interactive Advertising Bureau and PricewaterhouseCoopers.

Here's more bad news. Analysts predict that marketers will spend more on search advertising than display next year because search is considered a safer way to directly reach consumers. In other words, more money will go to Google than Yahoo.

Yahoo is steadily losing market share to Google (GOOG, Fortune 500), the leader in paid search. Google will score 73.5% of the $10.4 billion that advertisers will spend on search in the U.S. this year, according to eMarketer. Yahoo has a 13.3% share. (In 2007, Yahoo had a 15% share and a 20% share in 2006.)

Yahoo has introduced two major programs to increase profits in both search and display. The company struck an advertising deal with Google in June to outsource a portion of search ads. Yahoo hopes to generate as much as $800 million from the partnership next year. However, the Justice Department has delayed the deal while it conducts an antitrust review. Yahoo also introduced a new service last month to make selling display ads easier for marketers. Yahoo CEO Jerry Yang called the APT platform a "game changer."

Some industry observers are not convinced that the projections of a troubled economy will be that bad for Yahoo. The web portal is the leader in display advertising and will fare better than other content publishers, social networking sites and ad networks who are all chasing the same ad dollars.

"Yahoo has a long history with advertisers," says Russ Fradin, the president of online firm Adify. "They know what works and doesn't work. For advertisers, there's a flight to the familiar. If you're going to cut web spending, you cut the experimental dollars like social media or mobile."

Marketers say what really matters to them is getting the most value for their display dollars, whether ads appear on Yahoo's homepage or Joe Schmoe's sports blog. "It really depends on the opportunity," says John Owens, head of marketing for national bank ING Direct.

Owens says ING Direct is one of the few banks in "pretty good position" to take advantage of the expected display ad slowdown. Owens has no plans to make budget cuts in 2009 for online advertising. And he's cautiously optimistic about spending on search.

Owens is concerned that search ad rates will rise as more advertisers flock to paid search. "We'll see if this plays out in Q4 and beyond," he says.  To top of page

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