Yahoo! Nipping at Google's Heels on Email

Yahoo! introduced those 100-megabyte and 2-gigabyte email inboxes in June, responding to Google's April introduction of Gmail, with its 1-gigabyte storage space.

Today's announced increase in capacity for free accounts is unlikely to increase Yahoo!'s costs on a measurable basis, says Squali. "Server cost is very low," he says. "For Yahoo! to go from offering 100 to 250 is marginally immaterial," he says.

Squali has a hold rating on each stock, and his firm has a banking relationship with Yahoo!. He has a price target of $36 on Yahoo! and $160 on Google.

In other newly announced changes, Yahoo! says it has made it easier for email users to search the Web or the content of their email boxes. A Web/mailbox search is a prominent feature of Gmail. Yahoo! says it has improved an auto-complete function for addressing emails -- yet another prominent feature of Gmail.

"It's a war to try to have a better mousetrap," says Squali, "which at some point in the future they'll try to layer on some monetization model." That monetization, Squali assumes, will be click-throughs on relevant advertising displays.

While Gmail has gotten plenty of attention, Squali says he doesn't believe Google is generating any revenue from the service. He also notes that Google has kept some services in the beta, or testing, stage, for a long time. The comparison shopping service Froogle, for example, has been in beta-test mode for nearly two years.