From: Linda (joelinda1@home.com)
Date: Fri Sep 01 2000 - 05:51:20 PDT
[Wow. Front page Wall Street Journal article on the increasingly
competitive landscape for companies with advertising-driven business
models. With a lofty market cap of 67B, this is not something that
investors in Yahoo want to hear.
Linda]
http://interactive.wsj.com/articles/SB967757080141994584.htm
September 1, 2000
Yahoo!'s Grand Vision for Advertising
On the Web Takes Some Hard Hits
Clients and Agencies Balk at High Rates,
Question the Medium's Effectiveness
By SUEIN HWANG and MYLENE MANGALINDAN
Staff Reporters of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Yahoo! Inc. pulled off one of the Internet's
most ambitious business strategies: amass an eclectic range of online
services and build a huge audience that it could sell to advertisers.
But now it's clear that Web advertising isn't working as well as
everyone
had expected. And Yahoo, hailed as the Web equivalent of a national
television network and rewarded with a stock-market value over $70
billion, is suddenly finding it has less clout.
Advertisers and online-ad agencies say they're
getting increasingly solicitous calls from Yahoo
asking for business. Others say they are
getting deals on more favorable terms, and
some agencies are now doing a brisk business
renegotiating ad deals with Yahoo.
Jeffrey Bonforte has seen the sudden shift at
Yahoo firsthand. Chairman of a start-up
named i-drive.com (www.i-drive.com), which provides Web storage
services, Mr. Bonforte debated last year whether to buy ads on
Yahoo's Web site. At the time, a deal with Yahoo gave start-ups
credibility in the industry and on Wall Street. But Mr. Bonforte
decided he couldn't afford Yahoo's sky-high ad prices and onerous
contractual requirements.
Now, Yahoo is calling on Mr. Bonforte, and it's pitching the
value of its services, instead of demanding a big check. "The new
offers are much more about what our capabilities are and what we
could deliver to their users, rather than how much we could afford
to spend," Mr. Bonforte says.
Yahoo executives say the company has retained 98% of its largest
advertisers in the past six months. But Jeff Mallett, Yahoo's
energetic 36-year-old president, concedes that many advertisers
have found the Web a disappointment.
"There was a gap between expectations and
practical deliverables. I think that gap is being
questioned now," he says, sitting in a conference
room decorated in the company's trademark
yellow and purple.
Such concerns mark a watershed for Yahoo,
which has sailed on accolades and a roaring bull
market for most of its young life. While skeptical
investors have slammed shares of big
consumer-oriented Web sites like Amazon.com
Inc., Yahoo's status as a dot-com blue chip has
fared considerably better.
But the patina of invulnerability is fading. Where Amazon's fall
from grace symbolized the failure of the Web-retailing promise,
concerns about Yahoo speak to the failed promise of Web-based
advertising. In recent weeks, a growing minority of Wall Street
analysts -- a group that universally applauded Yahoo for years
-- have been voicing concerns about its ability to increase
advertising revenues. Yahoo's stock has fallen about 9.5%
since last Friday on the latest flurry of lukewarm reports.
No one thinks Yahoo will share the fate of the money-losing dot-coms
that once clamored for its ad real estate. Still a leader in online
advertising, Yahoo carries a tremendous amount of weight, attracting
61% percent of the country's Internet audience. The company is racing
into promising new areas that aren't dependent on ad revenue, such as
hosting online stores, conference calls and streaming audio Web-casts.
Anil Singh, Yahoo's sales chief, mentions other growth-oriented
efforts, such as offering free Internet service and the new Corporate
Yahoo platform, an effort to move Yahoo into the business-to-business
market by persuading companies to integrate Yahoo's portal into their
internal Web networks.
The financial performance at Yahoo, which analysts estimate gets 80% of
its revenue from advertising, remains strong. One of the few dot-coms
that turn a profit, Yahoo saw revenue more than double in the
second quarter to $270.1 million from $128.6 million a year earlier.
Excluding acquisition-related charges and employer payroll taxes, Yahoo
earned $74 million, compared with $27.1 million a year ago.
Still, a decline in advertising revenue could suggest a serious problem
with Yahoo's original vision. Its New Economy aura notwithstanding,
Yahoo has hewed to an idea born in old media -- a vision that declares
that advertisers will pay a big premium to be on the Web's biggest and
best-known site, just as they pay a premium to advertise on a top-rated
television program.
Now, some of the assumptions behind that vision are under attack.
Consumer response to banner ads, which, despite widespread criticism,
remain the standard method of delivering Web advertising, has crashed
to microscopic levels in just the past few months. Advertisers estimate
that the percentage of people who click on Web banner ads, once as high
as 4% to 5% of those who look at a page, now stands at a minuscule 0.3%
to 0.5%. Compare this with the economics of the dowdy junk-mail
business, which typically sees 2% of its targets not only look at
mailings but also respond.
Yahoo's executives say their click rates are higher than the industry
average but decline to be more specific. "We have 3,500-plus advertisers
around the world. With that many advertisers, there are going to be some
unhappy ones -- justified or unjustified," says Mr. Singh, the sales
chief.
There are still plenty of happy ones. ApartmentGuide.com
(www.apartmentguide.com) -- the online arm of the print publication for
apartment renters that is a subsidiary of publishing giant Primedia Inc.
-- has increased its spending with Yahoo sevenfold since October 1998.
Jamie Gallo, chief operating officer of ApartmentGuide.com, says the
number of customers it gets from a Yahoo ad is two times higher than
its nearest competitor because of its advertising relationship with
Yahoo. "They help us sell our product and add a lot of credibility,"
she says.
But Yahoo faces a broader question that goes to the very nature of Web
advertising. Does a Web ad make a lasting impression on a consumer,
like a Budweiser lizard, or does it only stir a momentary impulse to
buy a product, like a coupon in the mail?
Network TV and many print publications generally charge just for
delivering the ads to a certain number of people, but direct marketers
get paid based on the number of people who buy something immediately.
"It's the difference between a spot on the Olympics and 800 numbers on
late-night cable," explains David Smith, president of San Francisco
interactive media agency Mediasmith Inc.
Yahoo's executives say they're working hard to respond to advertisers'
concerns. The company has started a new effort to help traditional ad
agencies use the Web in their campaigns, while another program is
trying to measure the branding benefit of Web ads.
Until these programs succeed, Mr. Mallett isn't putting up a big fight.
"Is this a branding medium? Is it? No, not really," he says. "The
traditional building of a brand, which is to create an image, create
a feeling" -- he sighs loudly -- "not there yet." He believes that as
the Web evolves into a more TV-like medium, Yahoo will gain as a
branding medium. "Hopefullywe will, with streaming audio and broadband
-- make me laugh, make me cry. But that's where I think the industry
has a lot of growing up to do."
It was only a few years ago that Yahoo appeared poised to take over the
world. Founded by two Stanford University graduate school dropouts in
1994, the company launched itself on the shrewd concept that it would
be more than a just a tool for searching the Web. It would be a
full-fledged media property, an easy-to-use destination where consumers
could do everything from searching the Web to shopping and reading
e-mail and stock quotes. Cultivating a fun, cheeky image, Yahoo
captured the imagination of Web surfers and investors alike, amassing
an enormous audience as well as an incredible stock-market valuation,
$74 billion at present.
As the dot-com frenzy reached its apex last year, numerous start-ups
clamored to advertise on Yahoo, and industry executives say the company
didn't hesitate to use its extraordinary clout to secure the terms it
wanted.
Advertisers say Yahoo made them buy huge tracts of less desirable
advertising space -- spots at online chat rooms, for example -- which
tend to attract kids who don't have credit cards and can't buy online.
Only then would Yahoo agree to sell coveted ad slots, such as a
prominent position on its stock-market section. They say the practice,
known as bundling, supported prices of Yahoo's less popular areas.
Yahoo's top brass say they're working hard to improve the effectiveness
of its less-popular ad slots, but they make no apologies for demanding
as much as advertisers were willing to give during the dot-com frenzy
last year. "If I'm going to buy 'Survivor', I have to buy s,"
Mr. Mallett says heatedly, drawing an analogy to TV ad sales. "This has
been going on forever. I don't know that I'm going to apologize for the
industry doing what it's supposed to be doing."
When consumer Internet stocks plummeted last April and Web start-ups
began cutting costs, many of Yahoo's advertisers began using software
that could analyze their expensive ad purchases to see whether they
paid for themselves. Before that, many dot-coms were concerned more
about the impact a Yahoo deal would have on investors than about the
performance of the ads. "Start-ups now have the numbers that suggest
that maybe they don't need to deal with" Yahoo, adds Bill Gurley,
partner at venture-capital firm Benchmark Capital, based in Menlo Park,
Calif. "No one has to do anything anymore."
The new scrutiny brought unpleasant revelations. In August 1999,
LiveCapital had proudly announced its deal to become the exclusive
provider of small-business financing on Yahoo. In addition to paying a
fee for the placement, LiveCapital executives say they also bought
banner ads to run in the site.
Then the company found that acquiring customers through its Yahoo
placement was costing three times as much as other offline and online
marketing programs. Acquiring customers through the banner ads was
costing roughly eight times as much. "There's increased cynicism about
a lot of these deals because the economics don't work," says Chief
Executive Michael Grossman. LiveCapital has stopped advertising on
Yahoo and now focuses on selling its technology to other businesses.
Petstore.com last year spent $150,000 a month advertising on various
parts of Yahoo's site. "We were wasting millions of impressions in
numerous areas, and there was no way to make the deal any better,"
recalls Seth Baum, who served as director of marketing until Petstore's
assets were acquired by rival Pets.com Inc. (An "impression" represents
one sighting of a banner ad.) Mr. Baum says it was costing Petstore
about $200 to acquire a single customer on Yahoo; for Petstore to make
money, he figures the number should have been closer to $20.
Advertisers are now using the detailed information they can get on
consumer response as leverage with Yahoo. Perched in a cubicle high
above San Francisco's financial district, 27-year-old Jeff Forslund
taps intently on his keyboard, which shares space on his desk with
statistics textbooks and a cowboy hat. It is Mr. Forslund's job to
keep track of every single one of the thousands of online
advertisements hurled onto the Web every day by his employer, NextCard.
In a few keystrokes, Mr. Forslund pulls up a huge spreadsheet that
lists every banner ad that has run on Yahoo one day. He knows that on
Aug. 25, a banner on Yahoo called "Hatgame 0001" attracted 1,915
visits, 104 credit-card applications, and 22 approvals. He also knows
that those 22 people transferred pre-existing credit-card balances
averaging $1,729.
One of the Web's biggest advertisers, NextCard says it has just signed
a longer-term deal with Yahoo. While they won't divulge details,
executives estimate that overall, NextCard pays significantly less
than $5 per thousand Web impressions, compared with a Web-industry
average of $20 to $30. That has slashed its customer-acquisition costs
by two-thirds since the beginning of 1998.
Dan Springer, NextCard's chief marketing officer, believes that the
Internet is best at getting results rather than branding, and those
results say the industry norms on ad prices are too high.
In the meantime, some advertisers are starting to spread their
dollars over a host of far smaller, but vastly cheaper, alternatives
-- a movement being encouraged by online ad agencies. Gil Penchina,
eBay Inc.'s director of corporate development, says the auction site
has gotten good results with such smaller companies as eTour, which
delivers advertisers to users who have already indicated their
interests. "It's 10 times better" than Yahoo, he boasts. And eBay
says it pays less than $2 per thousand impressions.
And some online ad agencies say advertisers are now demanding from
Yahoo -- and getting -- shorter time frames, more flexibility and
cash outlays sometimes as little as a tenth of what they were just
a year ago. Says Anna Collins, vice president of media at
Seattle-based online ad agency Avenue A Inc.: "It used to be the
$20 million, three-year deal" when contracting with Yahoo. "Now it's
the $1 million to $2 million, one-year deal."
Yahoo executives say contracts are not shortening in length. They
say Yahoo's average contract length in the second quarter was over
220 days, compared to an industry average of three weeks. They add
that while many other sites are cheaper, Yahoo remains one of a
handful of portals that can generate a large volume of responses.
Yahoo's executives vow to "crack the code" -- find a way to relate
Web ads to their offline counterparts. Says Mr. Mallett: "We'll be
a better company because of this. We are a better company because
of this. We're adapting."
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