Here is it..
Yahoo!'s Grand Vision for Advertising
On the Web Takes Some Hard Hits
Clients and Agencies Balk at High Rates,
Question the Medium's Effectiveness
By SUEIN HWANG and MYLENE MANGALINDAN
Staff Reporters of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- Yahoo! Inc. pulled off one of the Internet's
most ambitious business strategies: amass an eclectic range of online
services and build a huge audience that it could sell to advertisers.
But now it's clear that Web advertising isn't working as well as everyone
had expected. And Yahoo, hailed as the Web equivalent of a national
television network and rewarded with a stock-market value over $70
billion, is suddenly finding it has less clout.
Advertisers and online-ad agencies say they're
getting increasingly solicitous calls from Yahoo
asking for business. Others say they are
getting deals on more favorable terms, and
some agencies are now doing a brisk business
renegotiating ad deals with Yahoo.
Jeffrey Bonforte has seen the sudden shift at
Yahoo firsthand. Chairman of a start-up
named i-drive.com (www.i-drive.com), which provides Web storage
services, Mr. Bonforte debated last year whether to buy ads on Yahoo's
Web site. At the time, a deal with Yahoo gave start-ups credibility in the
industry and on Wall Street. But Mr. Bonforte decided he couldn't afford
Yahoo's sky-high ad prices and onerous contractual requirements.
Now, Yahoo is calling on Mr. Bonforte, and it's pitching the value of its
services, instead of demanding a big check. "The new offers are much
more about what our capabilities are and what we could deliver to their
users, rather than how much we could afford to spend," Mr. Bonforte
says.
Yahoo executives say the company has retained 98% of its largest
advertisers in the past six months. But Jeff Mallett, Yahoo's energetic
36-year-old president, concedes that many advertisers have found the
Web a disappointment.
"There was a gap between expectations and
practical deliverables. I think that gap is being
questioned now," he says, sitting in a conference
room decorated in the company's trademark
yellow and purple.
Such concerns mark a watershed for Yahoo,
which has sailed on accolades and a roaring bull
market for most of its young life. While skeptical
investors have slammed shares of big
consumer-oriented Web sites like Amazon.com
Inc., Yahoo's status as a dot-com blue chip has
fared considerably better.
But the patina of invulnerability is fading. Where Amazon's fall from grace
symbolized the failure of the Web-retailing promise, concerns about Yahoo
speak to the failed promise of Web-based advertising. In recent weeks, a
growing minority of Wall Street analysts -- a group that universally
applauded Yahoo for years -- have been voicing concerns about its ability
to increase advertising revenues. Yahoo's stock has fallen about 9.5%
since last Friday on the latest flurry of lukewarm reports.
No one thinks Yahoo will share the fate of the money-losing dot-coms that
once clamored for its ad real estate. Still a leader in online advertising,
Yahoo carries a tremendous amount of weight, attracting 61% percent of
the country's Internet audience. The company is racing into promising new
areas that aren't dependent on ad revenue, such as hosting online stores,
conference calls and streaming audio Web-casts. Anil Singh, Yahoo's sales
chief, mentions other growth-oriented efforts, such as offering free Internet
service and the new Corporate Yahoo platform, an effort to move Yahoo
into the business-to-business market by persuading companies to integrate
Yahoo's portal into their internal Web networks.
The financial performance at Yahoo,
which analysts estimate gets 80% of
its revenue from advertising, remains
strong. One of the few dot-coms
that turn a profit, Yahoo saw
revenue more than double in the
second quarter to $270.1 million
from $128.6 million a year earlier.
Excluding acquisition-related charges
and employer payroll taxes, Yahoo
earned $74 million, compared with
$27.1 million a year ago.
Still, a decline in advertising revenue could suggest a serious problem with
Yahoo's original vision. Its New Economy aura notwithstanding, Yahoo
has hewed to an idea born in old media -- a vision that declares that
advertisers will pay a big premium to be on the Web's biggest and
best-known site, just as they pay a premium to advertise on a top-rated
television program.
Now, some of the assumptions behind that vision are under attack.
Consumer response to banner ads, which, despite widespread criticism,
remain the standard method of delivering Web advertising, has crashed to
microscopic levels in just the past few months. Advertisers estimate that
the percentage of people who click on Web banner ads, once as high as
4% to 5% of those who look at a page, now stands at a minuscule 0.3%
to 0.5%. Compare this with the economics of the dowdy junk-mail
business, which typically sees 2% of its targets not only look at mailings but
also respond.
Yahoo's executives say their click rates are higher than the industry
average but decline to be more specific. "We have 3,500-plus advertisers
around the world. With that many advertisers, there are going to be some
unhappy ones -- justified or unjustified," says Mr. Singh, the sales chief.
There are still plenty of happy ones. ApartmentGuide.com
(www.apartmentguide.com) -- the online arm of the print publication for
apartment renters that is a subsidiary of publishing giant Primedia Inc. --
has increased its spending with Yahoo sevenfold since October 1998.
Jamie Gallo, chief operating officer of ApartmentGuide.com, says the
number of customers it gets from a Yahoo ad is two times higher than its
nearest competitor because of its advertising relationship with Yahoo.
"They help us sell our product and add a lot of credibility," she says.
But Yahoo faces a broader question that goes to the very nature of Web
advertising. Does a Web ad make a lasting impression on a consumer, like
a Budweiser lizard, or does it only stir a momentary impulse to buy a
product, like a coupon in the mail?
Network TV and many print publications generally charge just for
delivering the ads to a certain number of people, but direct marketers get
paid based on the number of people who buy something immediately.
"It's the difference between a spot on the Olympics and 800 numbers on
late-night cable," explains David Smith, president of San Francisco
interactive media agency Mediasmith Inc.
Yahoo's executives say they're working hard to respond to advertisers'
concerns. The company has started a new effort to help traditional ad
agencies use the Web in their campaigns, while another program is trying
to measure the branding benefit of Web ads.
Until these programs succeed, Mr. Mallett isn't putting up a big fight. "Is
this a branding medium? Is it? No, not really," he says. "The traditional
building of a brand, which is to create an image, create a feeling" -- he
sighs loudly -- "not there yet." He believes that as the Web evolves into a
more TV-like medium, Yahoo will gain as a branding medium. "Hopefully
we will, with streaming audio and broadband -- make me laugh, make me
cry. But that's where I think the industry has a lot of growing up to do."
It was only a few years ago that Yahoo appeared poised to take over the
world. Founded by two Stanford University graduate school dropouts in
1994, the company launched itself on the shrewd concept that it would be
more than a just a tool for searching the Web. It would be a full-fledged
media property, an easy-to-use destination where consumers could do
everything from searching the Web to shopping and reading e-mail and
stock quotes. Cultivating a fun, cheeky image, Yahoo captured the
imagination of Web surfers and investors alike, amassing an enormous
audience as well as an incredible stock-market valuation, $74 billion at
present.
As the dot-com frenzy reached its apex last year, numerous start-ups
clamored to advertise on Yahoo, and industry executives say the company
didn't hesitate to use its extraordinary clout to secure the terms it wanted.
Advertisers say Yahoo made them buy huge tracts of less desirable
advertising space -- spots at online chat rooms, for example -- which tend
to attract kids who don't have credit cards and can't buy online. Only then
would Yahoo agree to sell coveted ad slots, such as a prominent position
on its stock-market section. They say the practice, known as bundling,
supported prices of Yahoo's less popular areas.
Yahoo's top brass say they're working hard to improve the effectiveness of
its less-popular ad slots, but they make no apologies for demanding as
much as advertisers were willing to give during the dot-com frenzy last
year. "If I'm going to buy 'Survivor', I have to buy s," Mr. Mallett says
heatedly, drawing an analogy to TV ad sales. "This has been going on
forever. I don't know that I'm going to apologize for the industry doing
what it's supposed to be doing."
When consumer Internet stocks plummeted last April and Web start-ups
began cutting costs, many of Yahoo's advertisers began using software that
could analyze their expensive ad purchases to see whether they paid for
themselves. Before that, many dot-coms were concerned more about the
impact a Yahoo deal would have on investors than about the performance
of the ads. "Start-ups now have the numbers that suggest that maybe they
don't need to deal with" Yahoo, adds Bill Gurley, partner at venture-capital
firm Benchmark Capital, based in Menlo Park, Calif. "No one has to do
anything anymore."
The new scrutiny brought unpleasant revelations. In August 1999,
LiveCapital had proudly announced its deal to become the exclusive
provider of small-business financing on Yahoo. In addition to paying a fee
for the placement, LiveCapital executives say they also bought banner ads
to run in the site.
Then the company found that acquiring customers through its Yahoo
placement was costing three times as much as other offline and online
marketing programs. Acquiring customers through the banner ads was
costing roughly eight times as much. "There's increased cynicism about a
lot of these deals because the economics don't work," says Chief
Executive Michael Grossman. LiveCapital has stopped advertising on
Yahoo and now focuses on selling its technology to other businesses.
Petstore.com last year spent $150,000 a month advertising on various
parts of Yahoo's site. "We were wasting millions of impressions in
numerous areas, and there was no way to make the deal any better,"
recalls Seth Baum, who served as director of marketing until Petstore's
assets were acquired by rival Pets.com Inc. (An "impression" represents
one sighting of a banner ad.) Mr. Baum says it was costing Petstore about
$200 to acquire a single customer on Yahoo; for Petstore to make money,
he figures the number should have been closer to $20.
Advertisers are now using the detailed information they can get on
consumer response as leverage with Yahoo. Perched in a cubicle high
above San Francisco's financial district, 27-year-old Jeff Forslund taps
intently on his keyboard, which shares space on his desk with statistics
textbooks and a cowboy hat. It is Mr. Forslund's job to keep track of
every single one of the thousands of online advertisements hurled onto the
Web every day by his employer, NextCard.
In a few keystrokes, Mr. Forslund pulls up a huge spreadsheet that lists
every banner ad that has run on Yahoo one day. He knows that on Aug.
25, a banner on Yahoo called "Hatgame 0001" attracted 1,915 visits, 104
credit-card applications, and 22 approvals. He also knows that those 22
people transferred pre-existing credit-card balances averaging $1,729.
One of the Web's biggest advertisers, NextCard says it has just signed a
longer-term deal with Yahoo. While they won't divulge details, executives
estimate that overall, NextCard pays significantly less than $5 per thousand
Web impressions, compared with a Web-industry average of $20 to $30.
That has slashed its customer-acquisition costs by two-thirds since the
beginning of 1998.
Dan Springer, NextCard's chief marketing officer, believes that the Internet
is best at getting results rather than branding, and those results say the
industry norms on ad prices are too high.
In the meantime, some advertisers are starting to spread their dollars over
a host of far smaller, but vastly cheaper, alternatives -- a movement being
encouraged by online ad agencies. Gil Penchina, eBay Inc.'s director of
corporate development, says the auction site has gotten good results with
such smaller companies as eTour, which delivers advertisers to users who
have already indicated their interests. "It's 10 times better" than Yahoo, he
boasts. And eBay says it pays less than $2 per thousand impressions.
And some online ad agencies say advertisers are now demanding from
Yahoo -- and getting -- shorter time frames, more flexibility and cash
outlays sometimes as little as a tenth of what they were just a year ago.
Says Anna Collins, vice president of media at Seattle-based online ad
agency Avenue A Inc.: "It used to be the $20 million, three-year deal"
when contracting with Yahoo. "Now it's the $1 million to $2 million,
one-year deal."
Yahoo executives say contracts are not shortening in length. They say
Yahoo's average contract length in the second quarter was over 220 days,
compared to an industry average of three weeks. They add that while
many other sites are cheaper, Yahoo remains one of a handful of portals
that can generate a large volume of responses.
Yahoo's executives vow to "crack the code" -- find a way to relate Web
ads to their offline counterparts. Says Mr. Mallett: "We'll be a better
company because of this. We are a better company because of this. We're
adapting."
Write to Suein Hwang at suein.hwang@wsj.com and Mylene
Mangalindan at mylene.mangalindan@wsj.com |
