On September 29, Financial Times proposed that Yahoo should focus on the Alibaba sale in a tax effective manner. Activist investors also suggest a potential merger with AOL as a way to realize cost savings and lower the effective tax rate (which would be an advantage in the sale of its stake in Alibaba). They also suggest fully returning the money to investors instead of using it in further acquisitions.
Yes, revenue has been stagnant and profits have declined. The aggressive acquisition strategy has not changed that outlook, at least not yet. M&A is a conventional answer to these scenarios, alas often over-hyped. Let’s take a deeper look at Yahoo’s businesses.
Search represents roughly 37% of revenues and has declined in 2013. According to comScore Yahoo has less than 10% market share in search which probably explains why they signed an agreement with Microsoft to use Bing as its underlying search engine. It helps cut R&D costs on a business with a small market share. Yahoo made no search-related acquisitions in Marissa’s tenure. The next challenge here is improving mobile search and advertisement revenues which they hope to address via Yahoo Gemini and Aviate.
Display contributes 42% in revenue and has decreased 9% in 2013. This business is a little more tricky and it can be split Communications, Digital Magazines, and Video, according to Yahoo. This is where the company acquired very aggressively (44 companies acquired since Marissa joined in 2012) and is in the process of integrating those acquisitions.
On Communications they offer Yahoo Mail which enjoys a reasonable 21% market share, according to litmus, compared to Gmail (40%) and Outlook.com (23%). The market hasn’t tipped and Yahoo is in the top 3. It also offers Yahoo Messenger and Yahoo Groups. They acquired Xobni to help offer a more personalized experience. So far there has been modest cosmetic improvements which is probably as much as they should do maintain share.
The biggest focus has been on Digital Magazines and Video which drives the bulk of ad revenue. Yahoo acquired Summly and quickly integrated it into a streamlined mobile content experience. The remainder of the acquisitions, such as Tumblr and Flickr, focus on increasing traffic. Yahoo has also integrated vertically with notoriety in Sports. New content partnerships with ABC, NBC, Saturday Night Live, and The Daily Show also focus on driving additional traffic. It’s all TAC to me. They also partnered with VEVO and are working to create exclusive content, similar to Netflix. They launched Yahoo Live and Yahoo Screen, both of which compete with YouTube. Yahoo Video market share is only 9%, a third of YouTube, according to comScore. The challenge here is the dependence on content providers. Plus many of the providers also work for competitors.
The elephant in the room is mobile where they have little presence. This is a problem since mobile is a traffic multiplier which means Yahoo is missing out. Yahoo does not control the OS nor the hardware layer so it is currently focusing on apps (e.g. weather). The sale of Alibaba will certainly generate enough cash for Yahoo to establish a strong presence either in the OS or smartphone business. An example here is Amazon launching a new phone and app store. This would be a bold move and some investors are skeptical. Well, what else are they going to do with those billions?