Is Yahoo About To Make Another Big Mistake — With Its Display Ad Business?

While most financial analysts and institutional investors don’t agree, a strong case can be made that Yahoo’s “sale” of its search business to Microsoft under former CEO Carol Bartz was a big mistake that has cost the company in numerous ways: revenue, talent and credibility. Is new CEO Scott Thompson, the former PayPal executive, about to make a similar mistake with display advertising?

The Wall Street Journal (WSJ) reported yesterday that Thompson and Yahoo might turn away from the company’s significant advertising business in favor of alternative revenue streams such as “fees and commissions.” According to the WSJ:

[Thompson] has made clear, however, that Yahoo’s nearly single-minded focus on its existing websites and online-advertising sales hasn’t worked, and that the “market” places little value on the company’s core online-ad business . . . 

In the past few weeks, Mr. Thompson has held intimate lunches and large-scale gatherings with Yahoo employees in which he has told attendees that he plans to divert more time and resources to Web services aimed at capturing future revenue, rather than trying to manage the profit margins of the company’s current services . . .

The article cites “nearly $1 billion from transaction-related fees on its auto, travel, shopping and other sites, where it takes a commission from the sale of products or services” as examples of the types of revenue streams Thompson may be seeking to expand.

While the article is based on second-hand information and speculation there’s an underlying logic on display. Thompson ran a business unit at eBay that made money on transaction fees (PayPal). And he’s not a person who has had much contact with the advertising or agency worlds it appears.

While his background as a technology executive and someone very familiar with consumer products was welcomed by many, his lack of experience with advertising was a source of concern to others. Yahoo’s principal revenue stream comes from advertising.

Thompson has promised to use the data collected by Yahoo to generate more revenue in various ways. On the Yahoo Q4 earnings call he said he plans to leverage consumer data to improve and personalize consumer experiences throughout Yahoo, including the ads:

One of the most important ways we will focus on optimizing the customer experience and advertising performance is by using data. We can use data to render the experience exactly the way you want it, to create uniquely relevant experiences and everything from content to the layout of the page, to the flows between pages, and then, of course, the advertising. . . 

If there’s one thing I want you to take away from today, it’s that our data may be Yahoo!’s single most underrated, under-appreciated and underused asset. And we intend to leverage that data. We’re getting after this with a real sense of urgency. I believe that data will be the key component for driving innovation at Yahoo! and it will be the cornerstone of the next generation of Yahoo! products and customer experiences . . .

Thomson spoke positively about the importance of Yahoo’s ad business on the earnings call. However the WSJ article suggests that he sees the ad business as stagnant and will look to other sources to boost revenue.

While it’s smart to “diversify” revenue and perhaps to develop more commission or fee-based income sources it would be a mistake to neglect Yahoo’s core display ad business. Yahoo cannot simply hope that its ad business can run on autopilot. If neglected, revenue will decline and that decline will accelerate as marketers shift their attentions (and money) to other places and platforms such as Google’s Display Network and Facebook.

Related Topics: Channel: Industry | Features & Analysis | Yahoo: Business Issues

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About The Author: is a Contributing Editor at Search Engine Land. He writes a personal blog Screenwerk, about SoLoMo issues and connecting the dots between online and offline. He also posts at Internet2Go, which is focused on the mobile Internet. Follow him @gsterling.

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  • http://www.seo-theory.com/ Michael Martinez

    Interesting story and analysis, but if history is any guide, he is probably being more shrewd and prudent than people are giving him credit for.  Yahoo! only barely managed to survive the dot-com meltdown when the banner advertising market flat-lined 10-11 years ago.  Being so heavily dependent on display advertising is a high-risk business model.  Maybe we’re about to head back into good times again, and maybe the advertisers won’t care about display that much longer.

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