Yahoo!'s (YHOO) new strategy is finally coming together. The prospects for a significant stock run-up, however, continue to look elusive.
The Internet giant announced plans on Tuesday to buy online ad company BlueLithium for $300 million. The venture capital-backed start-up runs the fifth-largest ad network in the U.S. and takes advantage of an evolving technology called behavioral targeting in serving up ads to Web surfers.
The move comes just halfway into new Yahoo! CEO Jerry Yang's 100-day review of the company's direction. But combined with other actions, this much seems clear: The company will increasingly look outside its own Web properties to sell ads, and behavioral targeting will continue to play a bigger role.
And while Yahoo! finally seems to be arriving at a smart strategy, the future of the company will be very different from what the past has been -- and Yang deserves credit for the recent changes.
But it's still too early for investors to get behind the embattled company or its stock.
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The BlueLithium purchase will give Yahoo! an increasing amount of ad space to sell outside its "owned and operated" network of Yahoo! domain Web sites. Selling ads on some of the most trafficked properties on the Web has long been the biggest driver of revenue for Yahoo!.
But with the rapid growth of blogs and social-networking sites like
and Facebook, the number of less-trafficked Web pages available for advertising has exploded.
"Over time, all of the portals realized that their market share of page views was slipping," says Jeremy Liew, a partner at Lightspeed Venture Partners and a former top executive at
Yahoo! seems to want to take the fullest advantage of this new landscape by positioning itself as the one-stop shop for advertisers looking to connect with users all over the Internet, and not just on Yahoo! site.
Indeed, the company seems to be
signaling as much in the recent executive changes it has announced.
The company's chief sales officer and head of global sales -- critical positions for Yahoo!'s success in selling its own sites to blue-chip advertisers -- have recently left the company. And the newly formed Global Partners Solutions group that will oversee all ad sales will be headed up by Senior Vice President Hillary Schneider, who has next to no experience in ad sales.
Still, Schneider spearheaded Yahoo!'s recent partnerships with a newspaper consortium. And the company seems to be betting that her acumen in striking deals with partners will help Yahoo! bring more and more new sites into its fold -- and prove to be a skill set more vital to the company in the future than old-fashioned ad sales.
The new strategy will be risky. By making more and more online ad space available to advertisers, the company also presents them with lower-cost options, which in turn could hurt its ability to charge top dollar for its most-trafficked site space.
Indeed, the company attributed its sluggish results last quarter to an increasing mix of cheaper online ad space entering the mix.
But Yahoo! is betting on behavioral targeting. Before displaying an ad, the technology considers many factors about a user's browsing behavior. A user who checked blogs about cars, for example, may be more likely to see an ad related to automobiles -- even on a site within an ad network that had nothing to with cars, like one offering horoscopes.
By providing advertisers with a more targeted audience, Yahoo! should be able to charge advertisers a higher rate than it would if it were delivering a more general audience. The company is also hoping that online ad exchange Right Media, which it acquired in April, will help it boost rates on this newer type of ad space by encouraging bidders to raise prices.
But despite BlueLithium's potential, its effect on Yahoo!'s bottom line over the near term is going to be limited. Thomas Weisel analyst Christa Quarreles estimates that the deal will contribute only about $25 million to the company's $2.2 billion of operating cash flow (EBITDA) in 2008.
Thomas Weisel makes a market in shares of Yahoo!
And if advertisers start to gravitate toward the new ad space at the expense of the premium ad space that has so far been Yahoo!'s bread and butter, the loss in pricing power could spell even more trouble ahead for a stock that, despite a five-day winning streak, has dropped 25% in five months.
Yahoo! closed Wednesday up 13 cents to $24.10.
Yang deserves credit for a creative and coherent new strategy. But investors should wait to see more results before jumping on board.