More bad news for Yahoo–and for Microsoft, now that Yahoo’s search business is Microsoft’s search business.
Yahoo’s biggest search affiliate, Korea’s NHN, is taking search in house. NHN runs Naver, Korea’s biggest search engine, which has a Google-like 65% share of the market.
According to Doug Anmuth of Barclays, this will cost Yahoo an astounding 10% of gross revenue in 2011.
Fortunately for Yahoo’s bottom line, the impact on Yahoo’s net revenue (after paying a 95% revenue share to NHN), will be much smaller, perhaps 1%-2%. (UPDATE: Yahoo says NHN contributed less than 1% of gross profit in the first half of 2010, so except for gross revenue, the impact is indeed small).
But losing 1%-2% of revenue in a customer defection is not what Yahoo needed right now. It’s also bad news for the Microsoft-Yahoo alliance, which will lose some advantages of scale.
Here’s Doug Anmuth’s take:
NHN’s decision to bring paid search 100% in-house and move away from Yahoo! toward the end of this year could lower Yahoo!’s 2011 gross revenue by as much as 10%, but reduce net revenue and EBITDA by only 1-2% given a very high TAC payout…
- NHN, whose Naver search engine accounts for ~65% of search queries in South Korea, announced yesterday that it will transition to its internal Click Choice paid search service when its deal with Yahoo!’s Overture expires later this year.
- We estimate that NHN will account for roughly $600 million in gross revenue to Yahoo! this year, but only about $30 million in net revenue assuming a TAC rate of 95%. Accordingly, we believe NHN is by far Yahoo!’s largest search affiliate on a gross revenue basis, but Yahoo! Japan contributes much more net revenue and EBITDA.
- Still, the loss of NHN comes one month after Yahoo! Japan announced that it would move search to Google (though still pay Yahoo! through 2017) and it represents another hit to the Yahoo!-Microsoft search alliance as it reduces the ultimate scale opportunity. Daum and Nate, the #2 and #3 search engines in Korea, both signed deals with Yahoo! in 1H10, but the loss of scale via NHN would make it tougher for Yahoo! (and Microsoft) to compete in this market going forward.
- On a more positive note, MSFT indicated yesterday that YHOO’s paid search integration to MSFT’s adCenter will begin this week and is on track for completion in late October. This is incremental to the integration of natural search results which was announced last week, though MSFT still kept the door open to full integration slipping to 2011 if there is any impact to the holiday season. Hitting the deadline ahead of the holidays would suggest better execution from YHOO and there could be some early revenue per search (RPS) benefits in 4Q, but we also don’t expect any real shift in advertiser budgets until 2011.
And here’s a statement Yahoo emailed us:
Yahoo! Korea (YSM) has been operating in the Korean market since 2002 and during that time has established a leading position working with all the major search companies in the country to support a significant network of local advertisers and businesses with their search marketing needs. The strength of the partnership with NHN has leveraged Yahoo!’s leading technology which has won local and international patents for its innovations in search.
Commenting on the recent announcement from NHN (Naver) to not extend the relationship, Rose Tsou, SVP of Yahoo! Asia Region, said “Yahoo! has one of the most robust and innovative search advertising platforms in the world and we will continue to partner with leading companies in Korea in search and display offerings as well as premium content, services and digital products. Our support for Naver through the transition period and as a strategic partner in Korea will not waver as a result of this decision.
For Naver search advertisers it will be “business as usual” as we work through the end of the contract period and for the advertisers who work with us every day, they will continue to benefit from Yahoo!’s technology through other major search partners that are of the highest quality in terms of traffic and share our customer-centric approach such as Daum, Nate and Paran.