Yahoo Ad Woes Foreshadow For-Fee Internet


The latest moans and groans from dot com sector watchers came in response to Yahoo’s sobering forecast of sharply-less-than-expected revenues, and a breakeven year. And yet another exec is making a lifestyle choice to step down – CEO Tim Koogle is out, and the search is on for a replacement.

To put the revised forecast in perspective, until very recently analysts believed Yahoo would earn 30-something cents per share this year, and as recently as December there were still forecasts of 50-something cents per share. A 50 cent discrepancy is not a “miss,” it’s a meltdown. But then again, other very large, very profitable tech companies, such as Nortel and Cisco, have also forecast sharply reduced earnings.

Online ad revenues flatlining

It boils down to one thing. Online advertising revenues – and that is still the bulk of what Yahoo makes its money from – are flatlining. Those of us who urged Yahoo to get off their brains and move faster towards a subscription model similar to that which makes AOL so profitable, and those who urged companies like Yahoo to use their stock to buy something tangible (like a piece of another media empire), have been vindicated. But in the long run, Yahoo may be proven correct in deciding to chart its own course.

As Yahoo moves at its own pace towards implementing more subscriber-only features, it will face a steady chorus of moans and groans, as the “unprofitable” customers Yahoo “fires” will undoubtedly squawk. Many will have a hard time digesting the news that what was free will now cost them money (or else). Hindsight is 20-20, but it may be more proof that the dot com boom’s “new orthodoxy” – growth towards ubiquity via free distribution, then “monetize eyeballs later,” has serious disadvantages.

Then again, there are powerful advantages to doing it this way. Companies of all shapes and sizes seem to have loss leaders designed to get their products into the hands of so many people that it becomes a standard. Palm, for example, is going to redouble its efforts in getting more low-end Palm mobile devices into the ordinary consumer’s hands, which analysts say is a roundabout way of going after the corporate market to challenge the high-priced RIM Blackberry. One supposes that the path towards monopoly is often an unprofitable one… but companies seek to follow this path because of the rewards that come at the end.

Fees vs. advertising: the case for fees

So the problem with “monetize the eyeballs later” really boils down to “how the monetizing was conceived”: through advertising. There are still services out there – excellent, fabulous services – which became ubiquitous through free distribution. In a desperate bid for profitability, they are now pestering us with advertising. Gator, the password remembering tool, has gone this route. I hope they will rethink it, and charge a fee instead. The advertising money just isn’t going to pay their bills, and forcing us to see the ads just annoys us. By contrast, a free message board software company, EZBoard, has recently gone to a fee-based model (which it’s cleverly calling EZBoard Community Supporter). For a low fee, I can (a) get the advertising off our message board while continuing to enjoy its powerful customization and frequent product upgrades; (b) do something about that helpless feeling of standing by and watching another good technology company go belly up; and (c) get some icing on the cake: a few premium features.

Whoever said that advertising should always be the tradeoff? I wouldn’t consent to having a yammering idiot bother me on the bus with his strange theories about armegeddon, in exchange for free bus fare. On the other hand, in the online spaces where people are searching for and discussing specific products, topics, and needs, advertising is often welcome. If advertising was not of any interest to anyone, of course, there wouldn’t be any advertising. What you’ve heard is true: the future of online advertising is vertical. That means trade publications, vortals, online communities, newsletters, message boards, and keyword-based searches all have a potential affinity with an advertising model.

The answer to the revenue problem facing Yahoo and countless others seems pretty straightforward, and it’s already happening based on market forces of supply and demand. Companies with powerfully useful services can simply start charging fees for them. If Gator – which I now find invaluable for logging me into the 15 or so places I need to log in with various user names and passwords everyday – tells me the service will cost $29 for a lifetime license or $10 a year, I will shell out in a heartbeat in exchange for the convenience the service offers. If they tell me it’s worth a lot more than that, I will more than likely
tell them to take a flying leap.

Consumers will become “trained,” as it were, to recognize the need to pay for software and online services just as they pay for any other convenience or tool. Those who devalue the advantages of being wired or completing a needed task with a helpful tool can simply be left behind; it’s that simple. In this society, many people (and not rich ones either) are willing to pay almost any premium for convenience. $100 would probably pay for a full year of “Yahoo Whatever.” I bet some people spend $100 a year on Glade Plug-Ins.

Recently, I checked my email and looked at stock quotes through my Yahoo! account using my mobile phone. It wasn’t all that much fun, but it might have been important to me. If I don’t have a Yahoo! account, I can’t do it – not nearly as easily, not in the way that I want to with data I’ve already entered in. If Yahoo makes me pay for a premium login “or else no Yahoo on your phone,” I’ll probably pay. You can get AOL on your phone, too. How much does it cost to subscribe to AOL for a year? $240+? That’s a long way from free.

Yahoo@Home revisited

Yahoo has long said it doesn’t want to be an Internet Service Provider. But I still think an alliance with @Home would serve both companies well. In fact, I still wonder why @Home uses Excite as its portal, since consumers prefer Yahoo. Excite should be shut down (or sold to Yahoo), and @Home should just adopt Yahoo as its online information service. And to access premium services, as I’ve been saying for some time, users would have to upgrade to Premium Yahoo.

Yahoo Adwords on the way?

Of course, Yahoo still has a few advertising rabbits to pull out of its hat. It’s been said that they will now start wooing larger companies and ad agencies “the old fashioned way” by wining and dining them and taking them to ball games. (Note to Yahoo! Canada management: I’ve never been in a corporate box at Skydome. My number is…) It’s also the case that there may be some substantial revenues left to squeeze out of Yahoo’s by-far-and-away-leading-the-pack search referral traffic. Google users know that inobtrusive text ads are now placed next to the search results through a program known as Google Adwords. But Google results also power Yahoo’s “web search” option (for the whole web index alternative to the Yahoo directory). As far as I know they haven’t got “Yahoo Adwords” running yet for this area, but I suspect that there would be heavy advertiser demand.

In the early days of the World Wide Web, a mass audience didn’t want to pay for online services, browsers, and other fun tech toys because they didn’t in fact do all that much for all that many people. They were seen as a toy – as a niche, geek, kid’s thing. It was also the case that many of us got into the Internet for free at first. The net’s main users and proponents were university librarians, engineers and programmers, graduate students, and professors. These people all felt a sense of entitlement to free email, free dialup service, etc. By now, the reality is far different. And now that the IPO-fueled subsidy of tech companies has given way to harsher business realities, consumers are for the first time going to be given the “choice”: pay, or don’t pay. Over time, more and more will make the decision to pay… or get left behind.

Related stories:

There were two particularly good pieces about Yahoo! this week, one by the New York Observer’s Christopher Byron, and one by Eliot Zaret of MSNBC. Have a look at these, and you’ll be up to speed. The rest, as they say, is details.

Yahoo! woes were there all along

[Excerpt: “Read carefully, the filings showed that more than a third of Yahoo!’s sequential advertising growth during the period was coming from funds leeched from the balance sheet of Ziff-Davis by a Morgan Stanley-underwritten IPO, then funneled by Softbank into the revenue coffers of Yahoo!. We laid out the paper trail, in detail, in a column at the time.”]

[Traffick says: and – if we’re looking at warning signs – did no one ever notice the length of Koogle’s hair? What’s next, a major tech company CEO who wears a red hat… or a beret?]

Eliot Zaret’s column: 10 Ways to Rescue Yahoo!
MSN Moneycentral/MSNBC

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