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Yahoo still has a future, but it needs radical reform
Yahoo understands that its time is up, at least in the company's current form. Although FY 2015 revenue was up 8% to $4.9 billion, the increase does not conceal the fact that compared to the 2010 high of $6.2 billion, revenue has been down 21% in aggregate over the past five years. In the same period, Google grew 150% and Facebook skyrocketed 650%. Yahoo is now starting to restructure, to either save the day or prepare for an acquisition beauty contest. In its Q4 2015 results conference call, Yahoo announced it will:
- Cut 15% of its workforce, or 1,700 employees
- Tighten its geographical focus
- Streamline the product portfolio
- Explore the option of "strategic alternatives," to Marissa Mayer's plan, de facto opening itself up to acquisition
Yahoo has not adjusted staffing levels to its increasingly marginal role in the online economy. The company is severely overstaffed with 12,000 employees at $4.9 billion revenue. Facebook has 11,000 staff, but makes $15 billion. Yahoo's announcement that it will cut 15% of its workforce is a first step to address this bloat, but much deeper cuts will be necessary to achieve a healthy revenue-to-employee ratio.
Yet its problems are not just in size, but are structural. Yahoo remains a desktop company in a mobile age. Media consumption is rapidly shifting to mobile platforms, and companies like Twitter and Facebook today generate the majority of their revenue from mobile. However, Yahoo still makes 77% of its revenue from desktop users. We do not see a clear strategy at Yahoo to change this. In fact, what the dial-up internet business is to AOL, desktop users are to Yahoo. It is not a glamourous business, but a solid backbone in the absence of a mobile strategy that it needs to monetize for as long and focused as possible. Yahoo must realize that its main user base today is not the cutting-edge, ever-connected millennial, but the digital laggard.
Relying on desktop users cannot be the only strategy, and Yahoo must continue to build its future. But it needs to change its approach. Yahoo's Marissa Mayer has been on an acquisition spree to build Yahoo's future, but these acquisitions have now been entirely written off by investors. Famously, she bought social media firm Tumblr for $1.1 billion, but its revenues are stalling as Yahoo has not invested enough in the platform. Yahoo has made acquisitions in all important future growth arenas such as social, mobile, and video. But, while this looks good on paper, under Mayer the company took a scattergun approach to buying its future, and there is no evidence of new products or synergies coming out of these acquisitions. They have not been properly integrated operationally and do not share an overarching vision.
Despite investor pressure and a gloomy outlook, we believe it is not too late for Yahoo to engineer a turnaround. But the new Yahoo needs to be a much slimmer and more focused company. We see potential in its role in advertising technology. Yahoo has world-leading technology and skills in this area. Consolidating its advertising and analytics capabilities and building a third-party ad network could make Yahoo a compelling alternative for advertisers who do not want to be locked into the Google and Facebook ecosystems.
Yet Yahoo remains an acquisition target and the company's announcement in its Q4 2015 investor call to look for strategic alternatives make this more likely. We see telecom firms such as AT&T or large media conglomerates such as Disney as potential buyers. Such a deal would mirror the recent AOL acquisition by Verizon, and Comcast's purchase of leading advertising technology providers. Both telecom and large media firms need to bring a growing part of advertising-related technology and media analytics in-house to improve advertising margins and assert their position towards Google and Facebook. Yahoo's assets in this area, coming from the Brightroll and Flurry acquisitions, may well prove to be a draw just as AOL's video advertising firm adap.tv was to Verizon.
Yahoo is still fixable, but whether management and shareholders have the patience to do this is another question.
Additional insights and analysis on this and other critical topics can be found at IHS Technology Advertising Intelligence Service.
Daniel Knapp is a senior director for advertising at IHS
Posted on 10 March 2016
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