October 4, 2006 4:00 AM PDT
What does Yahoo's ad warning mean?
The question, obvious to many, was: If multibillion-dollar Yahoo was worried about ad sales, should every other Internet company be nervous as well?
The answer, however, isn't quite so clear cut. Certainly, other companies that bring in big dollars selling ads for products like cars and home mortgages should share Yahoo's fears. The rest of the online ad market, however, is still doing well, say analysts."So far, our sources have indicated that (the online ad softening) has been primarily attributed to Yahoo and other sites that make money off finance advertising or cars," said Bear Stearns analyst Robert Peck. "Marketing sources say they're seeing a splinter of dollars that used to go solely to Yahoo now going to higher traffic sites, like MySpace, Facebook and YouTube."
But there's a big caveat to that reassurance: Sales of cars and houses tend to be the proverbial canary in the coal mine for the rest of the economy. If they continue to slump, everything from televisions to computers could also be impacted. And that means big consumer electronics companies and computer companies would also pull back on ad spending.
"I do think some of the things happening at Yahoo are not just Yahoo specific but are being driven by macroeconomic factors that are impacting the advertising market overall," said Mark May, an analyst at Needham & Co.
At a Goldman Sachs conference on Sept. 19, Yahoo Chief Financial Officer Susan Decker said the company had seen a bit of weakness in the past few weeks in auto and financial services advertising. She then forecast that third-quarter revenue, excluding traffic acquisition costs, would be in the bottom half of the company's forecast of $1.12 billion to $1.23 billion. Traffic acquisition costs are commissions paid to content partners.
It was hardly disastrous news, but enough to raise concerns. Yahoo is scheduled to report its results on Oct. 17. Analysts surveyed by Thomson Financial have been expecting revenue of $1.11 billion to $1.2 billion and earnings per share ranging from 9 cents to 12 cents.
A Yahoo spokeswoman said the company could not provide any further details on the financials. "Yahoo is in a good position with a strong, loyal and growing audience," spokeswoman Joanna Stevens said. "We do believe we are well-positioned for the long term."
Yahoo accounts for 45 percent of the money spent on online display ads in the financial services sector in the U.S., and a quarter of online display-ad spending in the auto sector, according to Nielsen/NetRatings. Those two areas accounted for 37 percent of Yahoo's total display-ad revenue from January to August this year, the market researcher said.
The situation at Yahoo may have been exacerbated by employees leaving over the last year, particularly in its ad sales force, May said. "Whenever you have that sort of turnover, particularly in your sales force, it makes it more difficult to plan around advertiser category softness," he said.
Overall, online advertising is healthy, research shows. Online advertising spending reached a record in the first half of 2006, according to figures released last week by the Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PWC). Internet advertising revenue in the U.S. was close to $8 billion in the first half of the year, up 37 percent from the same period last year, and exceeded $4 billion for the second quarter, up 36 percent from a year ago, the study showed.
Notably, Google, which leads Yahoo in search market share and search-related keyword ad sales, is on track to meet Wall Street expectations for a strong third quarter, Peck said.
Forecasts for online ad sales remain rosy, at least for a few more years. Online ad spending in the U.S. is expected to grow 26.8 percent this year from last year, 15 percent next year and 17.5 percent in 2008 before dropping off to just below 10 percent year-over-year growth in 2009 and 6.8 percent growth in 2010, according to the latest figures from eMarketer, which benchmarks its projections against data from IAB and PWC.
The projections reflect expectations of an overall economic downturn--but not in the near future, said David Hallerman, senior analyst at eMarketer.
That said, there are still those caveats to deal with.
"Companies pull back first on ad spending before they will pull back on spending directly tied to sales," Hallerman said. Online ads are at the top of the list to be canceled for companies facing sluggish sales, added Gary Stein, strategy director at Ammo Marketing.
"Online is really easy to pull back on; way easier than canceling on print or billboard inventory," Stein said. "Advertising is a lagging indicator of the market itself. If people are worried about paying the rent or the mortgage, they are going to be less receptive to an ad selling a car."
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