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Summary:

Taking a look at Yahoo’s first quarter number, one word comes to mind: heedless. Not “heedless”, as in Yahoo executives who led the Street on until it believed that, thanks to its vaunted Panama search technology, revenue and profits would surge in the first quarter of […]

Taking a look at Yahoo’s first quarter number, one word comes to mind: heedless.

Not “heedless”, as in Yahoo executives who led the Street on until it believed that, thanks to its vaunted Panama search technology, revenue and profits would surge in the first quarter of 2007. Or even “heedless”, as in investors who had gotten a little ahead of themselves by betting that Panama would deliver sooner than promised.

No, Yahoo CEO Terry Semel was clear on that point a quarter ago: “The first time we see any benefit will be at the end of the second quarter,” he told the New York Times. “Every quarter thereafter we will start to get better.”

Despite that cold dose of reality, Yahoo bulls bid up the stock 19% since that cautionary interview. It could charitably be written off to long-term optimism. But today, people are slamming Yahoo for getting it wrong.

“Yahoo recently overhauled its online advertising system, giving some investors hope for a positive earnings surprise. So far, that hope hasn’t materialized,” the Wall Street Journal wrote Tuesday. Who knew?

Any selling Wednesday on Yahoo’s first quarter results may miss the point. Yahoo could be facing tough times in 2007, but not because Panama didn’t lift profits in the first quarter, but rather because of something that happened last week: Google is finally getting serious about banner ads.

The real threat for Yahoo is that it could well remain on the wrong side of the profit pendulum. Here’s what I mean by that.

Yahoo was a big player in search before Google came along. But it didn’t capitalize enough on that position. Instead, it focused on branded ads (a nice way of saying banner ads – something that regular Web users have learned to either ignore or block, but not enough for Yahoo or, now Google, to care.).

Want to know the dirty little secret of Yahoo’s stock? It’s this: In the two years before Google went public, its stock rallied 376% to $28.61 from $6.01. As of Tuesday, before Yahoo’s first quarter 2007 report, it had risen another 12% to $32.09.

That’s partly because, before Google IPO, investors had nowhere else to put their money than Yahoo. Then came Google, who knew better than Yahoo how to make ad money off search results: that is, no banner, only text ads that maybe, just maybe may be relevant to you.

In other words, the pendulum swung. Search/text ads grew like crazy even if banner ads grew at a more-than respectable pace. Yahoo realized it had to match Google in its intuitive search algorithms, so it began to hatch Panama. It wasn’t an easy proposition. There were critical delays.

Still, Yahoo remained clear about Panama’s timing, warning investors if it would release later than expected – which is more than Google did for the un-beta release of Google News or that Microsoft did for … well, pretty much anything Microsoft ever did. No one ever called Panama vaporware.

And they shouldn’t today. Because the real risk for Yahoo is that Panama is finally catching up to Google right as Google is catching up to Yahoo in its core market of branded – er, banner – advertising.

This could go either way: If you’re a true believer in Google’s instincts, banner ads (along with video ads) will catch up with its text and search ads. But if Yahoo has been right all along, Google is essentially leveling the playing field to Yahoo’s advantage.

The antitrust concerns about the DoubleClick buyout are off mark, but I do wonder if they may help tip the balance from Google toward Yahoo.

Take Semel Tuesday on Yahoo as a alternative to Google: “We have heard concerns from various advertisers, ad agencies and others,” he told Reuters. “My guess is there’ll be some who are fine and there’ll be many who, perhaps, aren’t fine. That’s up to them.”

So it is. Everyone else, place your bets now.

Who will be the real heedless: Investors in Yahoo, which loses ads to Google because of its superior ad-personalization algorithms? Or investors in Google, because Yahoo’s Panama eats into its search pie, while the DoubleClick deal prompts advertisers to defect to the prime alternative, Yahoo?

Thank you, Internet gods. Just maybe, it is once again a two-horse race.

Kevin Kelleher is a writer living in Berkeley, Calif. He has a regular stock column at TheStreet.com and is a contributor to Wired, Business 2.0 and Popular Science. He has previously worked at Bloomberg News, Wired News and The Industry Standard magazine.

  1. Banners or text it’s all the same and not the issue. The online ads market is dominated by the following cycle.

    Advertisers choose the ad networks who combine the widest coverage with the best targeting of ads. They are willing to pay more for ads if the ad network can generate more impressions/clicks/conversions. Website owners choose the ad network that generates the most revenue. (Just Ask OM)

    Google has a wider coverage than Yahoo in sites to place advertising on. Googles ads have more eyeballs per day then Yahoo. Google targets ads better than Yahoo. Google generates more clicks and conversions and more money per click/conversion. Ergo, if switching costs are zero. If GigaOM can switch within the hour from Google to Yahoo and back again. Why would OM switch from Google to Yahoo? Well only if Yahoo generates more money for Om. And why would an advertiser use Yahoo. Only if Yahoo generates more business.

    It seems that at the moment Yahoo is not generating more income for both website owners as advertisers and Panama hasn’t helped.

    Now if only Google would introduce my Adsense for Charity idea to allow people to share a percentage of their Adsense income with charities and open source projects :-)

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  2. Well researched and well thought out article.

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  3. I’m not a marketing guy so take this with a barrel of salt.
    Aren’t banner ads for things I don’t know I need. Generating general interest and brand awareness.
    While text ads or search ads are for things I research and most likely to buy any time now, I’m actively searching.
    Now wouldn’t it be the next step to target me with banner ads for things I might look for next, based on my online info.
    Combine address info (got that from maps) with info about avg. income in the area, mortgage info (you don’t type in your starting addr. for directions do you, just to see how long it takes to get there), some financial info from email you got or spreadsheets you created online, or just plain who you communicate with. And it becomes pretty clear that I need an F40 :-) since my neighbor has one. Actually I’m looking for a Mountain bike, which Google knows by now.
    It’s all about digging ehm data mining (digging sounds so dirty), and I’m afraid Yahoo has no clue. Otherwise they would have used their mail,maps, stock look up info, a long time ago.

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  4. Everyone forgets that Google has a gigantic lead in the Contextual Advertising with Google AdSense. Google as of last quarter (Q4) did $1.2B in revenues on AdSense alone. Yahoo! and Microsoft has yet been able to launch a viable competitor to this. Both programs have been in a limited “beta” for over a year. Google’s decision to purchase Applied Semantics ($120M in 4/2003) and as a result create a contextual network beyond search is a defining moment in my opinion.

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  5. A couple comments.

    -In the long run, Google and Yahoo are both shooting to serve ads not just online as text or banner ads, but in every ad format there is such that there is the best match of audience, purchase behavior, and ad price. So what’s at stake here is the growing online ad market, plus the even more massive advertising in print, TV, radio, etc.

    -An interesting question is what will the structure of this industry be like in 3-5 years. Network effects and the cost of technology means it will likely be a fairly concentrated industry. But will it be monopolistic like Microsoft in desktop software or maybe more like Intel ($35B) and AMD ($5.6B) in processors, or something more balanced and/or with more players.

    -Even though Google appears to be making all the right moves right now, I think a couple things will weigh against them winning Microsoft-like dominance in the long term. One is that advertisers have a long and deep history of spreading money around in every other channel they do business in. The other is that google has been relatively greedy (or at least not very transparent) in it’s adsense program. While it has tremendous reach, the publishers on whose sites these ads are being served get a pretty thin slice of the pie for their trouble. My sense is that this slice has been declining as their market power has grown. As a result, both of these groups – advertisers and publishers – will have an incentive to limit the dominance of Google.

    -Another thing to note is the role that owning content, app, or other sites where banner/display ads are actually served will play in the battle (i.e., being a publisher). Although YouTube changed things, I believe that Yahoo is still more of a ‘publisher’ than is google and as such, they are more often capturing 100% of ad spend than is google (which does share at least a little revenue with publishers). Clearly, Google is trying to change that, e.g., web office, etc., but who gets the content side of the business right will also be a factor.

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  6. From a marketer’s perspective, banners are wonderful. But what about the user? Why was Google successful in the first place? And now they want to do what Yahoo does?

    What this means is that their differentiation will erode and more and more they will become the same.

    At that point, a new competitor who is driven more by user desires than advertising dollars will come in and offer what Google used to offer: search.

    Google will expand themselves to irrelevance. So be it.

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  7. [...] Yahoo took a beating on the markets today. Thank goodness I haven’t bought any of their stock. [...]

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