Yahoo's First Priority: Reversing The Search Revenue Decline

Yahoo search decline

Photo: Yahoo financial statements

This weekend, Yahoo fired its CEO and swapped out five members of its board of directors, which has overseen some disastrous choices for the company.Ross Levinsohn, who was head of product and has long experience in digital media, is taking over as interim CEO. He’s joined by three new board members with varying backgrounds: investor Dan Loeb (who was leading a proxy fight and nominated the other two new members), turnaround specialist Harry Wilson, and media consultant Michael Wolf.

Their first priority: reverse Yahoo’s recent revenue slide.

The company started shrinking during the downturn of 2008-2009, and has never fully recovered. Last quarter, it grew 1%, but that’s only after five straight quarters with revenue declines of 10% or more.

A big part of that decline comes from Yahoo’s dismal performance in search after outsourcing the back-end search technology and ad serving technology to Microsoft. Yahoo’s search revenue dropped 7% in 2010, and a whopping 41% in 2011 (see chart).

Here are three key issues in Yahoo’s search business.

  • Search front-end. Yahoo outsourced search results and search-ad technology to Microsoft, but Yahoo still controls the search user interface. It has not come up with any major front-end innovations in years, and as a result its search market share has been on a steep decline ever since the middle of 2011: Yahoo Search has been losing share to Bing and Google, falling from about 16% a year ago to 13.5% now (as per ComScore, U.S. numbers only.) Yahoo needs to reallocate resources to the search front-end to get Yahoo customers searching again.
  • Working with Microsoft to fix ad relevance and inventory. Notably, this does NOT mean that Yahoo should go back to providing back-end search and ad results, as it can’t bear those costs. But apart from losing market share, Yahoo’s other big problem in search is a decline in revenue-per-search. This is not an auction-pricing problem, since the audience for Microsoft-provided ads is now twice as large, which means more advertisers should be participating in the auctions. It’s a technology problem — either the ads are not relevant enough to draw clicks, or Microsoft is not serving enough ads for “inexact” queries.
  • Ending the Facebook patent lawsuit. Microsoft’s Bing just rolled out some interesting new social features, including tighter integration with Facebook and Twitter, with more deals to come with providers like Quora and Foursquare. Yahoo’s patent lawsuit against Facebook not only makes it impossible to get a similar kind of deal, but also poisons possible business development relationships with other companies. Yahoo should abandon and publicly renounce this suit.

Yahoo has lots of other problems — figuring out how best to capitalise on its Asian assets, better monetizing its huge mail user base, and fixing employee morale to start with.

But search has been the main reason for Yahoo’s recent revenue decline. Start there, and you start fixing the company.

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