February 20, 2001 3:10 PM PST

Yahoo feels the heat overseas

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As questions about Yahoo's future mount on Wall Street, doubters are probing another sore spot in the Web portal's operations: international growth.

Just as in the United States, overseas markets have been hit with an online advertising slowdown, and some analysts warn of other potentially more lasting problems.

International growth "has been inching up, but not as fast as everyone hoped," said Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray. "It is not significant enough to offset any major decline in the U.S. market."

Adding to Yahoo's international troubles, two of its key managers in Europe and Asia, respectively, resigned within two days of each other. Savio Chow, head of Yahoo Asia, resigned last week to spend more time with his family. Fabiola Arredondo, managing director for Yahoo Europe, resigned the day before to pursue other business interests, according to a Yahoo spokeswoman.

The spokeswoman said the departures and the recent report will not sway Yahoo's international efforts.

"We've been really successful in our international expansion and have established the number-one position worldwide," the spokeswoman said. "We expect our growth to continue. We have significant depth and breadth in our organization to continue growing our market share worldwide."

But Wall Street is not as optimistic. Analysts said it appears the online advertising slowdown has seeped into Yahoo's international operations.

Last week, Lehman Brothers analyst Holly Becker issued a report detailing some concerns.

"In 2001, we do not expect to see meaningful growth outside the U.S.," Becker wrote. "We understand that the online advertising market in Europe is experiencing a similar cooling off as the U.S., as advertisers are frustrated with the current effectiveness of the medium."

More than 40 percent of Yahoo's traffic comes from outside the United States and accounts for only 15 percent of its overall revenue.

On paper, it appeared that bridging the traffic-to-revenue gap would open the doors for strong growth. But Becker's report said international sales grew only 5 percent sequentially in the fourth quarter, concluding that Yahoo's overseas efforts were hitting the same obstacles as on the home front.

The difficulty in tapping revenue from overseas stems from the many variables not present in the United States. Most notably, consumer spending online in developing markets, such as certain Asian and Latin American nations, has not come to fruition.

Meanwhile, other factors such as language, telecommunications regulations, the lack of flat-rate pricing and socioeconomic differences make each region separate from others. Some regions have more advanced online spending behavior, while others continue to be viewed as potentially lucrative markets.

That may leave marketers more reluctant to spend their advertising budgets online because consumer habits have not been converted to the Internet in many areas. In addition, most consumers in developing countries cannot afford a PC, leaving the growth of a certain market limited to more educated, wealthier individuals.

"I think we're recognizing that marketers internationally are spending less to reach these people, and several markets are way behind the U.S.," said John Corcoran, an equity analyst at CIBC World Markets. But Corcoran added that Yahoo has made the most significant inroads abroad out of any U.S. Internet company.

Hits taken from the advertising slowdown will not spell the end of Yahoo, analysts say, although that may hasten its transition from dot-com darling to mature media company.

Yahoo owes much if not all of its success to date to the Internet boom. On the way up, it was able to take advantage of its online reach and prestige to score lucrative advertising and sponsorship deals aimed at scattering ad banners across the Web's most frequently visited sites.

Now, on the way down, those deals are harder to come by. Venture capitalists have pocketed their wallets, leaving many start-ups with big ad budgets out to dry. That eventually hit the Internet portals hard, many of whom depended heavily on these VC-funded ad budgets. As more start-ups died, so did the ad dollars.

Now the pressure is on to offset these dot-com losses and lure more mainstream advertisers. More importantly, Yahoo needs to shed its dot-com skin and step into the clothes of a major media company, according to Jordan Rohan, an analyst at Wit SoundView. That means beefing up its sales force and relying less on its former clout as a "must buy" for online ad spending, be it in the United States or abroad.

"It's just a very different game now," Rohan said. "Yahoo's competitors in the U.S. and Europe are now Disney, News Corp., Viacom and AOL Time Warner. Not Infoseek and Excite."

 

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