How will Yahoo address social networking?

The due date for Yahoo CEO Jerry Yang's strategic plan isn't here yet, but that hasn't stopped the handicapping. Bear Stearns analyst Robert Peck has a 22 page report addresses Yahoo's options.

The due date for Yahoo CEO Jerry Yang's strategic plan isn't here yet, but that hasn't stopped the handicapping. Bear Stearns analyst Robert Peck has a 22 page report addresses Yahoo's options.

His conclusions:

  • Yahoo will have to address its social networking strategy since Comscore reckons that social sites (think Facebook and MySpace) account for 60 percent of the world's Internet users.
  • These social sites have scattered the ad revenue pie.
  • Social sites threaten the portal business model--also known as Yahoo's bread and butter.
  • A company like Yahoo could monetize a social site with behavioral targeting.

The big question: What is Yahoo going to do about it?

Peck writes:

"One of the topics we feel the company must be reviewing closely is Social Networking. Yahoo! has looked at this closely in the past, and in our opinion needs to decide what steps (if any) need to be made for Yahoo! to solidify its future with the impact coming from this 'emerging' phenomenon. We put emerging in quotes because social networking is nothing really new - Friendster was started back in 2002, and Yahoo! already has its own social network in Yahoo! 360. However, industry data shows that Yahoo! 360 has been losing ground to more popular networks, and to compound the problem that social networks are growing much faster than the "traditional portals " like Yahoo!."

Peck also notes that Yahoo needs to step up its social media initiatives via acquisition or partnership "or risk being marginalized in some of their business."

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The general idea is that Yahoo could make a social site more relevant to advertisers by focusing on niches that today are nothing more than remnant ad inventory. For instance, my Facebook profile coupled with Yahoo's zip code information on me could yield an ad trying to woo me back to Comcast.

Peck's case is strong--obviously Yahoo has to do something about social media, but his recommendations leave a bit to be desired.

Building social networking features and combining them with Yahoo sites is being done today (Comscore data shows Flickr and Yahoo Groups are ranked No. 4 and No. 5 among social media sites, respectively.) But that only goes so far. Peck seems to come down on the side that Yahoo has to buy a social site.

What's on Yahoo's shopping list? Bebo, Friendster, Orkut (always nice to make Valleywag), Friendster and Hi5 are potential targets. And of course, there's Facebook.

Overall, though Yahoo's options are limited. It could partner with MySpace, which was the top social networking site in May, according to Comscore. Yahoo could buy one of those aforementioned sites, but it's unclear whether their business models (and user base) will stick.

Among Yahoo's options, only Facebook would provide the social networking rocket fuel that Yahoo is looking for. Hi5 is rated highly in total minutes spent globally, but wouldn't generate the buzz a Facebook purchase would.

Peck says the impediment to a Yahoo purchase is price. He said Yahoo has most likely considered Facebook, Bebo, Friendster and MySpace, but couldn't close a deal. Peck estimates that Facebook is worth as much as $5 billion to $6 billion depending on how you slice the numbers.

Facebook would provide the growth--Peck said Facebook pages viewed will be about 265 billion in 2007 and could grow to 1.6 trillion in 2016.

That eye-popping projection would mean Facebook would account for 5.5 percent of all Internet users by 2016, or the same amount Yahoo does today.

Those projections for Facebook are hard for me envision. But that really doesn't matter. Does Yahoo buy it?


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