Yahoo Faces Major Headwinds As It Tries To Rebuild Its Display Business

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Yahoo’s near-term prospects should be good, as the company is dumping lagging properties, re-vamping its sales engine, and benefitting from an online advertising recovery. 

However, a discussion at the Piper Jaffray Global Internet Summit this week highlights many of the challenges Yahoo faces as the leader in display advertising.


  • To sell new ad units based on engagement (formats beyond the banner ad that better interact with the user and content) and behavioural targeting, will require agencies to change the way they buy advertising and measure/report the effectiveness of campaigns.
  • Ad networks and exchanges are going to keep pressure on ad prices, because they are increasingly commoditizing display inventory.
  • Facebook and other social networks have stolen huge “time share” from portals like Yahoo, and they are rapidly are gaining prominence in the average online media buy.


At the conference, Piper analyst Gene Munster summed up the long-term challenges Yahoo faces by describing the current view in the investment community:

“I think there is this belief that Yahoo has the most valuable property on the Internet, the Home Page. And beyond that it’s a display ad business that over time will become more and more fragmented, and the value in Yahoo today is a diminishing asset.”

Munster is right about that belief.  And it’s justified. 

There will always be a place for premium advertising online, but technology from networks and exchanges are cutting into the average display media buy, enabling advertisers to reach a large number of users in a cheaper way, often in real-time.  This does not bode well for Yahoo, which needs to sell a ton of premium inventory at premium CPMs.


Much of the panel discussion focused on how Yahoo is leveraging its search and user data to improve its ad offerings. 

This is the right thing to do, but there are big hurdles to this strategy, namely:

1) Agencies are still stuck in the spreadsheet reporting mode of looking at impressions and clear ROI metrics, and

2) Facebook can use massive amounts of even better data to compete with portals like Yahoo.

The panel featured two Yahoo executives: David Kopp, Senior Director, Ad Products and Dev Patel, VP Custom Solutions North America Region. Here’s Patel on Yahoo’s increasing emphasis on behavioural data:

“When users come to Yahoo across all these assets, including the front page, they do one thing that is the most exciting, at least to me, which is they leave a data footprint. They tell me what they are interested in. They tell me what kinds of things they are searching on. They tell me what kinds of articles they are reading on. They tell me whether a user is interested in preparing for  the tax season for next year. They tell me whether the user is going to be interested in a particular geography from a travel perspective. And so on and so forth. When all this wonderful data footprint which has such high value, user intense type data that gets left on the Yahoo site, I find that attractive, and I look to build products, the kind of stuff that David talked about, which  will continue to drive value for Yahoo not just now but way into the future.”

Yahoo definitely has an opportunity to use its data in enhancing the targeting and engagement features of its ad products.  The problem is Yahoo is massive (nearly $7 billion in annual revenue) and will need to do this on a wholesale level in order to drive significant returns.  There are two major roadblocks to successfully doing this:

In order for Yahoo to move beyond selling impressions to selling engagment and behavioural targeting, agencies will also need to change how they evaluate campaigns.  Right now, media is bought by junior buyers who need to present the success of their campaigns to senior executives who can easily understand whether the buy was succesful or not.  This is typically done through easy to follow spreadsheets and presentations that report impressions, click throughs, and other quantifiable performance metrics.  It is very difficult (maybe impossible) to measure engagement and its associated ROI in a spreadsheet presentation.  While agencies will likely shift to some degree toward a new way of measuring and reporting their campaigns, a large shift is going to present a big challenge to Yahoo’s mission to create ad units beyond display.

Facebook has similar targeting and engagement features and has created products like engagement ads and self-serve display ads that are starting to gain traction.  Facebook’s massive audience is rapidly approaching Yahoo’s (340 million uniques for FB versus 580 million for Yahoo), and it is increasingly becoming a competitor for premium advertising.  Despite Yahoo’s unique combination of search and content properties, it certainly doesn’t own the engagement and targeting categories.


Yahoo executive Kopp had it right when he said “Ultimately the advertisers are going to get better performance from folks who actually are able to marry data and reach in inventory together.” 

However, Kopp goes on to say that the ad networks and exchanges (a major thorn in Yahoo’s side) are in trouble because “we aren’t going to let them have our inventory when we have the insight and we have the advertiser” (ad networks typically buy publisher inventory then re-sell it).

The problem with Kopp’s argument is that there is so much display inventory online that networks and exchanges will be able to survive without acess to Yahoo’s inventory.  Nevermind that Yahoo is having problems selling out its premium inventory at premium CPMs (we’ve heard it clears a lot of unsold premium inventory through its Right Media exchange).  There will always be a place for aggregated niche sites that provide targeting and scale to advertisers.

BOTTOM LINE: Yahoo’s strategy of emphasising engagment and targeting ad products over impression-based display is the right move.   But it’s going to be easier said than done.

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