Yahoo! goes direct for dollars

Happy Birthday from Yahoo! The Web's mega-portal is about to start sending out e-mail birthday greetings to more than 4 million registered users who've given permission for the service to contact them. Inside the special e-mails will be gift certificates from online merchants such as Music Headquarters or Freeshop.com. Sound enticing? That's the idea.

Yahoo! (Nasdaq:YHOO) is betting that the e-mail offers -- which will start in March -- and other direct marketing and targeted advertising programs will not only make its users come back to the Web portal more often, but will also bring millions in additional revenue from advertisers who will pay top dollar to get in front of people who are more likely to buy their products.

Yahoo! is making this move into the direct marketing arena because even the Mother of all Portals -- with more than $200 million in net revenues last year -- is under pressure to increase its ad dollars.

Bye-bye ad banners?
Across the Web, click throughs on ad banners have declined to less than one percent. What's worse, the average cost of an ad banner -- from which portals like Yahoo! admittedly get the bulk of their revenues -- is dropping.

In short, the Internet isn't growing fast enough to support the multi-billion dollar valuations of publicly traded Web companies like Yahoo!.

"I can't see online marketers supporting a $30 billion business [Yahoo!'s estimated market cap] with generic ad targeting," says Andy Pakula, CEO of Orb Digital, an Internet marketing firm. "Yahoo! needs better targeting capability."

Sean Finnegan, new media director at J. Walter Thompson, ad agency for companies like Ford Motor Co., Heinz and DeBeers, agrees. "Just because you're at the top of the Media Metrix list doesn't mean you're at the top of my media buy," says Finnegan.

That's why Yahoo! -- No. 3 on a list of most trafficked Web sites compiled by research company Media Metrix -- is readying a series of direct marketing and advertising programs that tap into its swelling databases made up of millions of user names, e-mail addresses, hobbies, geographic location and, yes, birthdays.

The result? Yahoo!'s sales pitch to advertisers is no longer just "we're big," a fact backed up by an average of 167 million page views a day. Now it's "we can put the right message in front of people at the right time," says Seth Godin, Yahoo!'s vice president of direct marketing.

Hunting for treasure
Already underway is the Yahoo Treasure Hunt Sweepstakes, where users hop around Web pages of participating advertisers, merchants or within Yahoo! itself, looking for clues. Along the way, players volunteer more detailed information about themselves -- which in turn will allow Yahoo! to show them ads that are more in tune with their interests -- in exchange for the chance to win prizes like a Mazda Miata.

These new ad programs are an "exciting evolution of Yahoo!'s business model," says Internet analyst Abhi Gami of William Blair & Co. "Web portals and other ad-driven content companies who don't know how to target their audiences properly won't make it in this industry," he declares.

Getting on target
Targeting -- making a message relevant to a person's interest -- has always been the great claim of Internet advertising.

But so far it's been done at a very basic level.

For example, the search directories sell keywords to advertisers (search for cars, get an ad for Toyota) or by channel (go to the Computers section and see an ad for Compaq Computers).

"Sending anticipated, personal and relevant messages to people makes it more likely they'll come back to Yahoo! and more likely that advertisers will come to Yahoo!," says Godin. "The big online spenders are always looking for a way to make their yield go up and are looking for return on investment-oriented, direct marketing programs."

Godin was the CEO of Yoyodyne Entertainment, a direct marketing company specializing in online contests and sweepstakes, which was acquired by Yahoo! for $32 million in stock in October.

Yahoo! isn't the first portal to send out targeted e-mails. Excite, which bought digital marketing company Matchlogic last year, has been running a targeted e-mail service called DeliverE. A current sweepstakes running with Excite's Travel Channel is the chance to win a Year 2000 trip to the Caribbean. The Caribbean trip entry form requests e-mail, name, birthday, and includes about a dozen questions asking whether you currently, or in three months, "plan to shop for vacation travel" or purchase books, music, computer equipment, use an online auction service or buy insurance.

In the year since the DeliverE program was launched, more than 7 million consumers have registered, with 3.7 million indicating a willingness to receive e-mail, says Mark Glassco, Matchlogic's director of e-mail marketing services.

"It enables us to target people based on their profile," says Glassco. "We can match the campaign to the individuals."

Furthermore, analysts say by building up a closer relationship with its users, Yahoo! will bring in more ad revenue.

"The more they use these programs to learn more data about their viewers, the higher CPMs [cost-per-thousand or the amount an advertiser pays to reach a thousand eyeballs] they can charge because the more targeted the banners will be that they'll show to people," says Catherine Skelly, senior analyst with New York investment banking and brokerage firm BlueStone Capital.