October 4, 2006 4:00 AM PDT

What does Yahoo's ad warning mean?

Yahoo startled the fast-growing Internet advertising community last month when it warned that a slump in ads from automotive and financial services companies would hurt upcoming earnings.

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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advertising sales, online advertising, Yahoo! Inc., traffic acquisition cost, PricewaterhouseCoopers Consulting

9 comments

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Yahoo did this to themselves
Anyone that uses Yahoo's financial message boards or e-mail know why they are losing advertisers. It is because they are losing users. Yahoo "upgraded" their financial message boards and services. "Improvements" include getting rid of sequential message lists and removal of real time quotes. Users flocked to other financial message boards and services. Now Yahoo is testing new charting that requires a very slow Java startup time. Yahoo's financial services used to be popular because they were so simple, easy to read and you could get all the important data on a single page. Now they are trying to hawk their premium services which include the real time quotes that used to be free.

Yahoo e-mail recently implemented a "feature" that causes all of your e-mail to be deleted if you have not logged in for three months. There was no warning. You simply logged in to find all your e-mail deleted with no way to get it back. I don't think you get it back even if you upgrade to their premium email that does not get deleted after 90 days.

See a pattern here? "Upgrade" a popular area of Yahoo to remove features. Then offer a premium service which has the features that made the original free service popular. I sure hope that enough users sign up for the premium services to make up for the lost advertising sales (but I don't think so).
Posted by grangerfx (41 comments )
Reply Link Flag
Yahoo Economy
With the Dow soaring past 11,800, I would have to agree with grangerfx. Yahoo is no longer the bellweather that C|Net seems to think it is. And sorry, but as much as you hope and dream that the economy is bad, you can't just make it happen by running ridiculous stories like this.
Posted by Neo Con (428 comments )
Link Flag
Yahoo did this to themselves, pt 2
Financial services and cars are THE most expensive class of keywords with the exception of personal injury, lasik, and porn. They range in price from $2 to over $7 per click. The prices were driven up by the uncritical love affair the media has with search engines.

The problem is... Yahoo's controls for click fraud are so awful that more clicks than not are likely to be fraudulent. Google at least allows the option of not using content partners. Yahoo does not.

I programmed a 1 pixel pop-up to test my Yahoo PPC effectiveness and found that 86 percent of my PPC traffic was not staying around for even a few seconds, giving me incontrovertible proof that I was not getting real, human eyeballs. So, like any prudent advertiser, I pulled the campaign. When enough other ripped off advertisers do the same, the price will inevitably drop, since the pricing is driven by auction.

Natural Search optimization is the only way to go with Yahoo.

Mark
Free Link Building E-Course at www.viralinks.com
Posted by 208mbrandon (23 comments )
Reply Link Flag
Just Bean Counters at Work, Spoiling the Soup.
Wow all those salaries being eleminated must have made the quarterly numbers look great.

But firing salesmen is NOT how to grow a company.
Posted by disco-legend-zeke (448 comments )
Reply Link Flag
Impending Legal Decision Is Why
I am among many small business owners who are part of a class action that is in the process of being decided. It will certainly cause a slump in expensive advertiser accounts with Yahoo no matter how the decision goes. The decision has nothing to do with keyword-value and everything to do with the failure of Overture, Yahoo's ad service, to honor budgeting requests when we signed up and chose a shut-off feature in our accounts, to stop spending from spiralling out of control.

There was supposed to be an automatic stop once a chosen level of hits was reached, but this did not always happen.

If the budget feature were honored, it would have been easy for most businesses to quality-check their clicks within the tracking systems and then make informed choices.

The media has talked about the false-click problem, but this budget setting in the advertisers' accounts could have been honored even with the false click problem. It is a whole different failure on Yahoo's part.

Personally, I did not lose much. I found out about the lawsuit when I was notified that my business appeared in the list of affected businesses that was turned over to them. I had already taken such losses in other ways that I had not noticed this one.
Posted by matteau (1 comment )
Reply Link Flag
Yahoo generally
I was unaware of the class action, but it doesn't surprise me.

I believe that companies can be judged by their general attitude to customers and business practices. In a way, they have a 'personality'.

If people don't do what they say they will, they lose friends. If people behave consistently for a time and then go crazy - that is, radically change their behaviour - then people lose trust.

It shouldn't be surprising that the same thing happens with companies.
Posted by jezzur (191 comments )
Link Flag
Oh, dear Lord...
Only complete idiots would finance a mortgage or buy a friggin' car through a website... Cars are big - online car sales are multi-state, meaning different requirements (mostly California-based) and pretty (relatively) hefty transportation charges.

A mortgage is the absolute biggest investment most people ever make in their lifetimes... you think people at large are going to sign away 30 years of their money to something they saw on a banner ad!?

Just because people wise up to the fact that the Internet isn't usually the best place to do either of those things doesn't mean the economy is suddenly going to evaporate. "canary in a coal mine" my arse...
Posted by Penguinisto (5042 comments )
Reply Link Flag
This is funny
Maybe instead of it being gloom and doom for the internet ad industry, it's actually a downturn in clickfraud. Maybe companies that deal with Yahoo! and Google are tired of paying through the nose for phony click throughs.
Posted by mattumanu (599 comments )
Reply Link Flag
Incompetence and Idiocy
Yahoo is shooting themselves in the foot by not taking advantage of a supreme opportunity in the Pay-Per-Click market. Since Google has overhauled their keywords algorithms to a point that is tantamount to extortion, Yahoo should be wooing Google advertisers away who know they are getting raped. Instead, Yahoo Search marketing has been inoperative for at least the last 48 hours by some glitch that they can't seem to fix, which is costing advertisers (like myself) tens of thousands of dollars. I can't log into my account to make changes or stop the flow of my advertising dollars. Plus, their overall interface is so clunky and harder to use than Google's. Yahoo needs a major shakeup in their management to get things rolling again.
Posted by ebeamsales (36 comments )
Reply Link Flag
 

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