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Yahoo! Wins War Against Icahn And Microsoft - But Now What?

by Karsten Weide, IDC

On Monday, July 21, 2008, Yahoo! and investor Carl Icahn announced that they had reached an agreement to end their ongoing proxy battle. In this conflict, Icahn had tried to take control over Yahoo!'s board in order to sell the company to Microsoft. In the settlement, Yahoo! agreed to expand the board from nine to eleven members and give Icahn three seats. In return, Icahn will no longer pursue the proxy contest.

This deal means that Yahoo! has won the war with Microsoft and Icahn. With three Icahn votes vs. eight Yahoo! votes on the company's board, there is no way to force a sale of the company anymore. Yahoo! will not be sold to Microsoft, neither will its search business, and Jerry Yang will remain its CEO for the time being. Yahoo! can now focus on turning itself around. Here is a list of the most important sectors Yahoo! will have to target.

Search. Yahoo! must catch up to segment leader Google in search. Search will remain the most important sector of the online ad industry for the foreseeable future. In the short term, it will be key for Yahoo! to convince lawmakers that its recent deal with Google under which part of its search ads are sold and served by Google is not anti-competitive. This initiative generates revenue that Yahoo! would otherwise not realize, while it does not decisively improve Google's lead over Yahoo!.

In the long run, Yahoo! needs to fix its search ad business and discontinue the Google partnership. Two things will have to happen: One, Yahoo! needs to increase its search ad inventory, i.e., its search traffic, by improving the quality of its search results and aggregating third-party search traffic. Two, its search ad platform Panama needs to be improved to enhance the placement and click-through rates of search ads on Yahoo!, thereby making them more attractive for advertisers.

Display ads are the second most important advertising format on the U.S. Internet. Yahoo!, while being the market leader, only holds an about 15% segment share, so it will be key to increase its own non-search traffic and aggregate third party inventory. Yahoo!'s AMP initiative, in which the company wants to develop a market place for third party players, is the right way to go. Offering behavioral targeting (BT) technology to all its partners, as planned, will be a key competitive asset.

In terms of segments that will make a difference in the future, mid-term, online video ads will be the most important one. TV advertisers are eager to move hundreds of millions of dollars worth of television ad budgets onto the Internet. The problem is that there is not enough quality inventory that could carry video ads.

It now seems unlikely that user-generated, social networking video content will attract a lot of these TV marketing dollars, and that includes Google's YouTube. Rather, the future of online video advertising will belong to anyone who will be able to aggregate a comprehensive offer of premium video content and enough brand-safe advertising inventory. News Corp. and NBC Universal's joint-venture Hulu.com is farthest ahead in this regard. However, even it only offers part of the premium video content in existence, and it also doesn't have the distribution it would need to be successful. Yahoo!'s distribution and Hulu.com's content could be a match made in heaven, especially if they succeed to add the content of other providers. Yahoo! already has a distribution partnership with Hulu.com, but so far none of the latter's content can be found on Yahoo! Video. Either the existing agreement needs to be consummated, or a new agreement needs to extend the old one.

Long-term, mobile advertising will be a segment that decides over who is going to be a big player on the Internet. While this is a tiny segment so far, it will be one that is worth billions of dollars in five years time and beyond. Our latest survey on audience reach on the mobile Internet shows that Google is pulling ahead of Yahoo!. But Yahoo! currently has the more comprehensive mobile product offer. And with its Yahoo! Go mobile Web browser it already offers a smart phone interface while Google's Android is still six months away, which could help Yahoo! to bolster distribution. Yahoo!'s next steps must be to get the new Yahoo! Go 3.0 out of beta, and to get more third party programmers to write widgets for it.

In social networking, a segment of key importance to attract users and generate ad inventory, Yahoo! is strategically well positioned to play a leading role. The future of social networking is not in destinations such as Facebook and MySpace. It is in ubiquitous social networking functionality. With its Yahoo! Open System initiative, in which the company intends to eventually open up the entirety of the Yahoo! platform to external developers, it will be able to offer pervasive social networking functionality across all of its services.

Asia. The commercial future of the Internet lies well beyond North America and Europe. China alone already has more Internet users than the U.S. Now imagine this number of online consumers to multiply over the coming years, combine this with a dramatic growth in per-capita GDP and a broader adoption of the new media by advertisers, and it is easy to see why Yahoo! cannot afford to not be present in APAC. There has been some talk that the company might want to sell its Asian assets. But unless such a sale would be a matter of do or die, Yahoo! must cling to what it has in APAC and invest further.

The war is over, the dust settles, and Yahoo!, though badly shaken, is still standing. It does have the assets and the strategy to turn itself around. Now it has to execute on that strategy. However, even if it succeeds, it will take two years before its new initiatives will gain traction.



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