Yahoo! takes pulse of consumer demand

Yahoo! is looking at new ways to make money online as advertising revenue falls
Written by Jim Hu, Contributor
Yahoo! is considering several new paid services, including broadband access, that could help the Web giant find new sources of revenue amid a steep decline in online advertising. A series of customer surveys making their way onto Yahoo! sites in recent weeks suggest the company is readying what may be its most serious effort yet to cut its dependence on advertising, although it's unclear whether Yahoo! will actually launch any of the services. Among other things, recent Yahoo! surveys take the pulse of consumer demand for a Yahoo!-branded high-speed Internet access service and a secure corporate instant-messaging service. As previously reported, the company also is testing the waters for paid Web-based office applications. A Yahoo! spokeswoman would not comment on the surveys or whether the company will enter any of the new businesses suggested by the surveys. "We pride ourselves on conducting extensive research on various targets, whether they prove to be future services or not," she said. "We field numerous surveys to gather and analyse the interests of our users." But with the company's shares down 90 percent from their 52-week high, it's investors, not just customers, who are commanding Yahoo!'s attention. Corporate and premium consumer services have been a rallying cry for Yahoo! since late last year, when it became clear that the Internet economy was headed for a meltdown. But nearly six months into the reign of new chief executive Terry Semel, Yahoo! has made little progress in weaning itself from advertisers. As of its last earnings call, the company said it expects 80 percent of its revenue to come from advertising, as opposed to about 85 percent in 2000. The decline in online advertising spending has so far forced Yahoo! to cut revenue forecasts in half since the beginning of the year, from more than $1.4bn to between $700m and $775m -- an outlook that may be reduced further when the company issues third-quarter earnings results later this month. Even with the prospects of new services on the horizon, analysts said Yahoo! faces a difficult task in selling them to paying customers, a resource that has been scarce to date online. "Yahoo!'s motives here are pretty clear," said Mark Mooradian, an analyst at Jupiter Media Metrix. "They're continuing to try to diversify revenues away from advertising. But I think consumers, especially in these trying times, are not going to warm up to subscriptions overnight unless the offering is truly compelling." Hints that Yahoo! is considering entering the high-speed Internet access business came last week, when the company began promoting a consumer survey on its site. One of the surveys asks a series of questions to determine people's appetite for paying for Web-based services that were otherwise free. Then, in a series of questions about people's Internet connection speed, the survey asked what services people would prefer for high-speed access at home. The options included America Online, cable companies, local telephone providers, Microsoft's MSN and Yahoo! (if offered as an Internet service). In a separate survey, readers were told to assume that Yahoo! has a version of its instant-messaging service for internal use in small and midsized businesses. Dubbed the "secure" version of Messenger, the proposed service would include secure login, encrypted messaging and peer-to-peer messaging. The survey then asked whether people would "be willing to pay for such a 'secure' Messenger." Third quarter looks grim
The exploration for new revenue sources comes as Yahoo! faces an increasingly bleak financial outlook. Already, Wall Street analysts are sounding alarms, warning that Yahoo!'s business for this year and next remains questionable. With the 11 September terrorist attacks that brought down the World Trade Center and severely damaged the Pentagon, advertising pullbacks as a whole have given the media industry a significant blow. Last week, Jordan Rohan, an equity analyst at Wit SoundView, reduced Yahoo!'s revenue estimates for this year and for 2002. Rohan said Yahoo! would generate $608m in revenue for 2001, down from the company's prediction of between $700m and $775m for the year. Rohan also said earnings would break even in 2002, instead of his previous estimate for earnings of 13 cents per share. Other analysts said they plan to wait for Yahoo!'s upcoming earnings report on 10 October before making any adjustments to their expectations. "I don't know how you can really tell what's going to happen for the fourth quarter," said Kathleen Heaney, an analyst at Brean Murray. "I really don't know how to figure out how bad it can be right now." While advertising has weakened, it remains the pillar of Yahoo!'s business. In its most recent earnings call, the company said that it expects only about a fifth of its revenue to come from other sources. A significant percentage of this revenue comes from sales of its Corporate Yahoo! product, which services companies looking to manage their internal employee Web network. Its licensees include McDonalds, Bayer and Seagate Technology, to name a few. Other sources of non-advertising dollars include its broadcast services division, which offers a way for companies to Webcast internal meetings. The remaining percentage comes from Yahoo!'s premium services, which the company has introduced more aggressively in the past year. But analysts say they are still waiting for evidence that these services are helping the bottom line significantly. Paid services being offered range in price and generally do not have a unifying price plan or a central hub to shop for them, analysts said. Typical examples include tweaks to Yahoo!'s personals and Geocities Web-hosting services, changes that together have little promise of delivering more than a fraction of the company's overall revenue. Some analysts are more bullish about a planned online music service. Yahoo! has an agreement to sell songs through Pressplay, a subscription service backed by Vivendi Universal and Sony that is scheduled to launch by the end of the year. The missing link?
While there is no assurance that Yahoo! will enter the high-speed Internet access business or create a for-pay instant-messaging service, research aimed at gauging the potential of both could signal a considerable change in Yahoo!'s strategy. Yahoo! has long downplayed any desire to own an Internet service provider and has never made significant inroads in co-marketing partnerships with other ISPs. The company has always maintained its stance of keeping instant messaging free and has never publicly considered offering a corporate version of the service. Yahoo! executives and outside observers have long debated whether the company needs to run its own Internet access business. The company has watched as competitor Excite.com sold its business to high-speed cable ISP @Home; America Online acquired Time Warner, which owns the second-largest cable network; and Lycos sold itself to Spanish ISP Terra Networks. The results have been a mixed bag. Excite@Home has filed for bankruptcy and Terra Lycos continues to struggle as AOL Time Warner begins to launch its AOL cable ISP service. But some analysts think the environment is ripe for Yahoo! to get into the access business. At a time when advertising continues to slump, Yahoo! needs a boost in recurring revenue. As AOL Time Warner can attest, selling subscriptions provides a safety net for media companies in the event of a down advertising market. Could Net access provider EarthLink be a partner? EarthLink is expected this year to generate $1bn to $1.2bn in revenue for 2001, according to Frank Gristina, an analyst at SunTrust Robinson Humphrey who covers the company. And despite the collapse of many Internet stocks, EarthLink on Monday traded at $16.15 in the midafternoon, which gives it a $2.1bn market cap. EarthLink could also provide Yahoo! a foothold into high-speed cable services. EarthLink has an agreement to provide broadband cable access to Time Warner Cable subscribers. EarthLink has already launched in Columbus, Ohio, and Syracuse, New York. However, buying EarthLink may be more difficult than ever. Yahoo!'s once-mighty stock has plummeted with the rest of the online media sector and now trades around $9 a share, down from its 52-week high of $92. "I think EarthLink would be an incredible fit, but I don't think Yahoo! can afford them right now," Gristina said. See the Internet News Section for full coverage. Have your say instantly, and see what others have said. Click on the TalkBack button and go to the Telecoms forum. Let the editors know what you think in the Mailroom. And read other letters.
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