Small Business and Technology Focus

Return to Article

Yahoo! Defends Ad-Sales Turf

Vishesh Kumar

For Yahoo!(YHOO Quote), small acquisitions such as Flickr and MyBlogLog have been the norm in recent years.

But on Monday, the Internet giant said that for $680 million in cash and stock it would acquire the remaining 80% stake in online advertising firm Right Media that it didn't already own.

The move marks Yahoo!'s largest acquisition since it paid $1.6 billion for ad technology firm Overture in 2003.

Combined with Yahoo!'s 20% stake, the deal values the profitless Right Media at more than 12 times the $70 million it expects in 2007 revenue -- for a total of $850 million. Yahoo! paid $45 million last October for its initial 20% stake, meaning the company is now willing to pay almost four times what it thought was a fair value price just six months ago.

The size of the deal -- and its rich valuation -- underscores the value Yahoo! places on Right Media's auction approach to selling ads. In a conference call for investors, Yahoo! said the amount it was willing to pay was more influenced by the boost it felt Right Media could give its efforts to sell display advertising than by the stand-alone value of the company.

The purchase of Right Media, which takes a cut from offering a stock-market-like exchange that connects buyers of online advertising with publishers, is intended to help bolster the rates Yahoo! gets for its own ad space. A growing amount of this ad space comprises so-called nonpremium inventory, placements outside of key spots on Yahoo!'s Web sites that also usually garner lower rates.

"There is a lot of nonpremium inventory being created from many sources, including user-generated content as well as from traditional companies," Yahoo! CEO Terry Semel said in an interview on Monday. "That raises the question of how that inventory gets the best exposure, and we were fascinated by what we saw Right Media doing and the reactions we were seeing."

The increasing mix of lower-priced nonpremium inventory slowed the growth rate of Yahoo!'s overall display ad revenue during the first quarter and caused the company's share price to tumble after Yahoo! reported its latest quarterly results.

Google's(GOOG Quote) recent charge into the display ad market through its $3.1 billion acquisition of DoubleClick will likely put further pressure on Yahoo! in an arena where it has long assumed its lead.

In the short term, Yahoo! is hoping to increase the rates that its growing roster of nonpremium spots command by bringing more buyers into the mix.

"We believe the biggest fundamental issue regarding Yahoo! shares now is the significant deceleration in its display ad business," Citigroup analyst Mark Mahaney wrote in a research note on Monday. "If this deal allows Yahoo! to materially better monetize its nonpremium display ad inventory (perhaps one-third of its total display inventory), then we believe this deal will work." Citigroup makes a market in Yahoo! shares.

But far from Yahoo!'s merely boosting prices for nonpremium inventory, Semel sees a "revolutionary" potential in the "open" model -- one in which a marketplace dictates a price, as opposed to one in which prices are predetermined -- that Yahoo! is seeking to forge. Over time, it could come to encompass even the premium space currently sold by a dedicated salesforce and move beyond display into emerging areas such as mobile, Semel said.

For now, though, Semel is confident that making it easer to access more of the cheaper online ad space won't cut into Yahoo!'s lucrative premium territory. Advertisers will approach the two types of space differently, he says. "Today, the premium inventory still requires meeting customers and a lot of one-on-one work," he said.

While a big believer in the open model of selling display ads, Redpoint Ventures partner Chris Moore agrees. Redpoint was the only venture capital firm to invest in Right Media, and Moore says his firm was struck by the potential to sell display ads in the same bid-driven manner that search ads were being sold.

Still, "premium placement on things like home pages is highly coveted, and advertisers will continue to work with a direct sales force for those," Moore says.

Yahoo! shareholders should hope that's the case. The biggest setback for the deal would be if Right Media's model worked all too well, drawing ad dollars out of the ad space that is called premium for good reason.