Updated from 7:23 p.m. EST

With things looking this grim for

Yahoo!

(YHOO)

in 2001, imagine how bad they'll be across the rest of the Internet.

Yahoo!, the biggest of the pure-play Internet companies after

America Online

(AOL)

, guided estimates way down for its financial performance this year. And that means a lot of smaller Internet companies out there -- and there are a lot of them -- better get ready to buckle down. In late trading, Yahoo! was down 21% from its closing price and Net advertising firm

DoubleClick

(DCLK)

was down 20%, as investors recoiled at the depth of the Net ad market's ills.

The most obvious reason for people to start whistling a dirge is that in the world of advertising, money flows to the top: The top 50 publishers on the Internet in the U.S. win more than 90% of advertising revenue. And if the big boys suffer, the smaller ones will no doubt suffer more.

"If Yahoo! can't significantly grow, the pain for other consumer sites is going to be grotesque," says Alan Meckler, CEO of online technology information company

internet.com

(INTM)

.

Vitamin C

In a conference call with Wall Street Wednesday evening, the company talked about several measures it was taking to stay healthy: adding new, subscription-based premium services, bringing in new, high-level executives from outside the company, and cutting costs in the first quarter to a level 5% below what they were in the fourth quarter of 2000.

In an interview with

TheStreet.com

after the call, Yahoo! President Jeff Mallett said the company would focus on cost reductions in marketing and distribution -- not cancelling initiatives, but delaying them. He added that the company would keep a tighter rein on hiring: "No layoffs," he says.

But it's not just that Yahoo! will be laboring away to keep its head above water over the next year. In the course of its quarterly conference call, company executives said several times that they intended to use this downturn to take market share from everyone else. "The great companies use challenging times to their advantage," said Yahoo! CEO Tim Koogle on the conference call.

Yahoo! also indicated that although it's wonderful to replace dying dot-com clients with bricks-and-mortar customers, the security of a lower credit risk doesn't come for free. Chief Financial Officer Sue Decker indicated that hand-in-hand with the new clientele, the company's days' sales outstanding -- an indication of the amount of time a company has to wait for customers to pay up for services received -- would rise from the 27 days at the close of the fourth quarter to a range of 30 to 50 days over time. She indicated that it was because of a smaller credit risk; of course, it's also a reflection of a customer with more power to flex with a vendor. If Yahoo!'s DSOs are doubling, well, imagine how things will work for its smaller peers.

Specializing

In Meckler's opinion, though, Yahoo!'s bad news isn't a disaster for everyone on the Internet; It's just an indicator of how being a generalist consumer site on the Internet is the wrong way to go these days. "It's the

General Electric

model: diversify," he says. The problem Yahoo! has, he says, is as it gets into businesses such as auctions and broadcasting, "They're not No. 1. ... They'll never get to No. 1. ... The Yahoo! brand doesn't mean anything in these other areas."

Instead, Yahoo! and other sites should follow the example of print magazines and specialize. "You're a fashion magazine, a business magazine, a sports magazine or a trade magazine," he says. "That's really the way the Internet is going informationwise; no one is going to go to Yahoo! for specialized information."

Mallett responds that the company is focusing on essential services for consumers and businesses. "Yahoo! is an integrated collection of many businesses," he says.

Despite the remaining difficulties ahead, both Mallett and Meckler see bright spots. The ongoing economic slowdown and advertising softness probably won't go on much further, Mallett says; he's looking to the second quarter of 2001 for recovery. "The vast majority of the impact has been in the past six months," he says.

If companies can make it past these lean times, Meckler says, the advertising business will take off: "Anyone who survives through 2001 and is content-oriented ... is going to be worth many times what they are today," he says.