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Yahoo's Challenge

Yahoo faces many challenges as it tries to turn vast sums of data it has on visitors into revenue. Another challenge: that little company called Google.

The world's in love with Google and search-based advertising. That leaves Yahoo, the Google of the '90s and still the most popular destination on the Web in terms of visitors, to prove there's a better way to deliver advertising. But to do that, Yahoo needs to translate the 10 terabytes of data a day its visitors create and turn that raw information into marketable insights.

Listen to Yahoo's chief data officer, Usama Fayyad, sell the story.

Yahoo's chief data officer Fayyad knows if you're about to buy a new car.

Yahoo's chief data officer Fayyad knows if you're about to buy a new car.

"Search advertising is great. I can match ads to intent," Fayyad says. "Well, guess what? When you're on the Yahoo network--whether it's travel, whether it's autos or researching universities--you're telling a lot more about yourself and your intent. And I can use that. I can turn that into a very powerful ad-matching machine, just like search is. In fact, in many cases, much more powerful than search. It's just that the market hasn't discovered it yet."

That's a pretty big "just." Yahoo's challenge is convincing advertisers and marketing companies that it has a data-driven model that creates a more effective means of reaching consumers than first-generation search-based advertising. It's a challenge the 12-year-old Web portal needs to overcome if it hopes to regain its position at the top of the Internet mountain after being shoved aside by Google, the darling of Wall Street and the favorite Web site of information searchers throughout the world.

Not that Yahoo is hurting. Its $5.26 billion in revenue last year was 47% more than 2004. Not bad. But not Google, which had $6.1 billion in 2005 revenue, a 92% increase from 2004. Meanwhile, Google has been gaining search market share at the expense of MSN and Yahoo. Between November 2004 and November 2005, Yahoo went from handling 32% of Internet searches to 29.5%, according to comScore Media Metrix. No wonder Google's market capitalization stood at around $106 billion earlier this month, more than double Yahoo's market cap of roughly $46 billion.

More Than Search
But Yahoo is much more than search. It has popular E-mail and instant messaging applications; social-networking, personals, and photo sites; extensive E-commerce operations; and news and other forms of content. Yahoo Music was the No. 1 music site on the Web, with more than 23 million unique visitors a month, according to comScore Media Metrix.

Yahoo also is more diversified than Google, with 12% of its revenue coming from user fees. As for advertising revenue, Marianne Wolk, a financial analyst for the Susquehanna Financial Group, estimates that 58% of Yahoo's ad revenue in 2005 came from search advertising, while 42% came from contextual ads designed to promote a brand. For Google, only 3% to 4% of its ad revenue came from advertising unrelated to search.

That's not all bad. Search advertising is growing faster than contextual advertising online. "I find it illogical to make a case that it's better to be diversified when search is growing so much faster online," Wolk says.

That's why Yahoo is laboring to find new ways to take advantage of its vast stores of content, computing horsepower, and employee brainpower. It's worth remembering that the Web site founded in January 1994 as Jerry and David's Guide to the World Wide Web by two Stanford University graduate students grew into one of the most valuable companies on the planet, with a market cap of more than $140 billion at its peak in January 2000.

It may be that the Google-Yahoo rivalry tends to be overstated. The online ad market is still young and both companies continue to grow. "It's not a zero-sum game," says Chris Sherman, executive editor at Search Engine Watch, an online search news site. Advertisers think they need to market through both Google and Yahoo, he notes. But it's Google that gets most of the attention now as it glides into new markets--news, shopping, images, maps--seemingly on a daily basis.

Other numbers highlight Yahoo's challenges: It generated revenue of $535,000 per employee last year, while MSN generated $648,000 and Google generated $1,484,000, according to market research firm Outsell. "Google's low head count and high productivity reflect its heavy reliance on technology to do the heavy lifting," says an Outsell report.

Beyond the metrics, Yahoo also has a perception problem. Research shows that advertisers rate Google higher than Yahoo on the effectiveness of its online advertising, says Chuck Richard, an analyst with Outsell. Google's advantage in search is often cited, Richard says, while it's rarely mentioned that Yahoo has more unique users and that they spend 10 times as much time on Yahoo.

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