Market Insight

Yahoo still has a future but needs radical reform

February 03, 2016  | Subscribers Only

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Yahoo reported revenue of $1.3bn for Q4 2015 and FY 2015 revenue of $4.9bn, a 8% year on year growth from 2014Growth drivers were native and video advertising. Mobile also contributed 23% to total revenue. During its results conference, Yahoo announced substantive restructuring measures:

  • Yahoo will cut 15% of its workforce, or 1,700 employees.
  • Geographical focus will be tightened with emphasis on US, Canada, the UK, Germany, Hong Kong, and Taiwan. This means a de facto exit from other European markets and Latin America.
  • The product portfolio will be streamlined, eliminating Yahoo Games and Smart TV. Digital magazines will be either move to their four core verticals (news, sports, finance, and lifestyle) or get shut down.
  • In further product streamlining, Yahoo Screen was already dropped at the end of 2015. Video, part of CEO’s turnover strategy over the last few years, contributed $375 million of GAAP revenue, a 64% year-over-year growth, but accounts for 7.7% of the total reported revenue.
  • Yahoo is exploring the option of strategic alternatives, de facto opening itself to acquisition.

Our analysis

Yahoo has not adjusted staffing levels to its increasingly marginal role in the online economy. The company is severely overstaffed with 12,000 employees at $4.9bn revenue. Facebook has 11,000 staff, but makes $15bn. Yahoo’s announcement to cut 15% of its workforce is a first step to address this bloat, but much deeper cuts will be necessary to achieve a healthy revenue to employee ratio.

Yet its problems are not just in size, but are structural. Yahoo remains a desktop company in a mobile age. Media consumption is rapidly shifting to mobile platforms, and companies like Twitter and Facebook today generate the majority of their revenue from mobile. However Yahoo still makes 77% of its revenue from desktop users. We do not see a clear strategy at Yahoo to change this. In fact, what the dial-up internet business is to AOL, desktop users are to Yahoo. It is not a glamourous business, but a solid backbone in the absence of a mobile strategy that it needs to monetize for as long and focused as possible. Yahoo must realise that its main user base today is not the cutting-edge, ever-connected millennial, but the digital laggard.

Relying on desktop users cannot be the only strategy, and Yahoo must continue to build its future. But it needs to change its approach. Yahoo’s CEO, Marissa Mayer, has been on an acquisition spree to build Yahoo’s future, but these acquisitions have now been entirely written off by investors. Famously, she bought social media firm Tumblr for $1.1bn, but its revenues are stalling as Yahoo has not invested enough in the platform. Yahoo has made acquisitions in all important future growth arenas, such as social, mobile and video. But while this looks good on paper, under Mayer, the company took a scattergun approach to buying its future, and there is no evidence of new products or synergies coming out of these acquisitions. They have not been properly operationally integrated and do not share an overarching vision.

Despite investor pressure and a gloomy outlook, we believe it is not too late for Yahoo to engineer a turn-around. But the new Yahoo needs to be a much slimmer and more focused company. We see potential in its role in advertising technology. Yahoo has world-leading technology and skills in this area. Consolidating its advertising and analytics capabilities and building a third-party ad network could make Yahoo a compelling alternative for advertisers who do not want to be locked into Google and Facebook ecosystems.

Yet Yahoo remains an acquisition target, and the company’s announcement in its Q4 2015 investor call to look for strategic alternatives make this more likely. We see telecom firms such as AT&T or large media conglomerates such as Disney as potential buyers. Such a deal would mirror the recent AOL acquisition by Verizon, and Comcast’s purchase of leading advertising technology providers. Both telecoms and large media firms need to bring a growing part of advertising-related technology and media analytics in-house in order to improve advertising margins and assert their position towards Google and Facebook. Yahoo’s assets in this area, coming from the Brightroll and Flurry acquisitions, may well prove to be a draw just as AOL’s video advertising firm was to Verizon. 


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