Pardon the Information

Yahoo! is one of the oldest and largest Internet companies in the world. In the last year, TechCrunch has been chronicling Yahoo!'s management and merger issues. Interested in understanding Yahoo!'s situation from a long-term perspective, I have illustrated the profitability of the industry and performed a SWOT Analysis to generate strategies for Yahoo!'s management team.


According the CNN's Fortune 500 magazine, Yahoo! is in the Internet Services and Retail industry which is comprised of Amazon, Google, Liberty Media, IAC/InterActiveCorp, eBay, Sabre Holdings, and Expedia. In 2007, the Internet Service and Retail industry experienced a 7.0% return on revenues (i.e., efficiency of operations), a 5.0% return on assets (i.e., productivity of assets), and an 8.9% return on equity (i.e., power of equity). In 2007, Yahoo! operated near the industry average profitability with a 9.5% return on revenues, 5.4% return on assets, and 6.9% return on equity. In 2007, its main competitor, Google, led the industry with a 25.3% return on revenues and 16.6% return on assets, and was the industry runner up with a 18.5% return on equity. The following chart illustrates the recent trend in industry profitability with data from 2005, 2006, 2007. Specifically, the following chart shows that Yahoo!'s profitability has declined at the same pace as the industry's decline in profitability while Google's profitability has remained consistently strong. Further, Yahoo!'s profitability peaked in 2005 because their profitability in 2003 and 2004 was similar to their profitability in 2006 and 2007.


The following stock chart shows how Yahoo!'s stock has been plummeting in recent months and, particularly, why a SWOT analysis is needed :)


Interestingly, as Yahoo!'s stock price has plummeted, its monthly unique visitors has remained steady with that of Google's monthly unique visitors. Further, Yahoo!'s 11/7/2008 Form 10-Q shows that their 2008 revenues are similar to their 2007 revenues but that their operating expenses have increased. Thus, Yahoo!'s stock price is correlated more with investor expectations of future profitability than it is with Yahoo!'s current usage and revenues.


SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. It is a brainstorming exercise to generate strategies that use internal strengths to maximize external opportunities, use strengths to minimize threats, minimize weaknesses by taking advantage of opportunities, and minimize weaknesses and threats.

Internal Strengths

1. Affiliate partnerships with eBay, WebMD, Cars.com, Forbes.com, and the Newspaper Consortium
2. Globally recognized brand
3. Expansive Internet properties and ad network that includes Yahoo! Mail, My Yahoo!, Yahoo! Search, and Flickr
   
4. 2.1 billion in cash and cash equivalents
5. Copyrights, patents, and trademarks
6. Developer APIs allow entrepreneurs to create mash-ups

Internal Weaknesses

1. Management attrition
2. Anti-takeover provisions make a third-party acquisition more difficult
3. Less experience in managing a search service than competitors
4. Weak blog and social network platform (i.e., Yahoo! 360)
5. Outsourcing of data centers, data providers, and streaming content providers
   

External Opportunities

1. Acquisitions of smaller technology companies including ad networks, social networks, and content providers
2. Be acquired to create new synergies
   
3. Internet usage on mobile phones is increasing
4. Online video is growing
5. Social networks are growing in usage but have are not as profitable as search engines
   

External Threats

1. Recession causes a reduction in online advertising spending - most Yahoo! ad contracts are on per click basis or limited to one year in duration; in addition, search volumes can decline at any time
   
2. Converging technologies and fierce competition from Google, Microsoft, and AOL
3. Device and platform freeze out - for example, Google's Android mobile platform and Window's Internet Explorer encourage users to use their Internet services instead of Yahoo! services
4. Traditional media companies are increasing competition for advertising dollars because they are putting more focus on online revenue (e.g., Disney, CBS, and NBC)
5. U.S. and foreign government regulation of Internet, mobile, and Voice over Internet Protocol
6. Network Neutrality ends and Yahoo! is required to pay usage fees to Comcast, AT&T, or Verizon
7. Click fraud

Use Internal Strengths to Maximize External Opportunities

• Use 2.1 billion in cash and cash equivalents (strength #4) to buy Automattic, the makers of the blogging platform WordPress (opportunity #1 + weakness #4)
• Use it affiliate partnerships (strength #1) to deliver ads on mobile phones (opportunity #3)
• Use it affiliate partnerships (strength #1) to deliver ads on new social networks like MyYearBook.com (opportunity #5)
  

Use Strengths to Minimize Threats

• Partner with Sprint whose CEO recently dissed Android (opportunity #3) to become the default services for mail, search, maps, and photos on Sprint phones (strength #3) and, thus, minimize device free out (threat #3)
  

Minimize Weaknesses by Taking Advantage of Opportunities

• Acquire promising start-ups and their leaders (opportunity #1) to assemble a new senior leadership team (weakness #1)
  

Minimize Weaknesses and Threats

• Remove anti-takeover provisions (weakness #2) to facilitate an acquisition (opportunity #2)
• Partner with traditional media companies (threat #4) to deliver video content (opportunity #4) and social networking features (opportunity #5)
• Use 2.1 billion in cash and cash equivalents (strength #4) to acquire third-party data centers, data providers, and streaming content providers (weakness #5)

• Yahoo! Investor Relations
• CNN's Fortune 500 Top Industries (2008)
• CNN's Fortune 500 Top Industries (2007)
  
• CNN's Fortune 500 Top Industries (2006)