How Yahoo Can Catch Google: YANG's CHALLENGE: BUILD ON STRENGTHS

Jun 20, 10:40 AM

Current Headlines: By Elise Ackerman, Ryan Blitsteinand Troy Wolverton, San Jose Mercury News, Calif.

Jun. 20--Compared with most companies, Yahoo is in good shape.

But Yahoo's problem is that it's compared with Google, one of the fastest-growing and most profitable companies in the world.

Despite having more popular products that keep people on its site longer than any other property on the Web, Yahoo found itself a distant second to the awesome moneymaking machine that Google had become. That ultimately led to Monday's dramatic management shake-up, with Terry Semel replaced as chief executive by co-founder Jerry Yang.

Current and former Yahoo insiders agreed there is no easy way to turn the Internet giant around. But they also agreed that Yahoo shouldn't try to out-Google Google. Instead, they said, it should focus on the assets it has, a collection of highly popular Web sites and services that offer it a tremendous opportunity.

People who know Yang said he could begin to close the gap with Google by focusing on his company's uncanny ability to identify Internet services that resonate with ordinary Americans. "Jerry can get the organization focused on product development," said Ashwin Navin, co-founder of BitTorrent, who worked at Yahoo from 2002 to 2004.

"Yahoo has done well with content in finance, sports, movies, travel, autos," said Rob Solomon, former vice president and general manager of the Yahoo Shopping Group, now president and CEO of Santa Clara travel search engine SideStep. "All on their own are very successful businesses, No.1, 2 or 3 in the categories they play in."

Google either doesn't have those channels or is trailing far behind, he noted. The channels provide Yahoo with prolonged contact with Internet users and could be useful in boosting advertising revenue.

However, they aren't now, primarily because Google makes far more money than Yahoo from search advertising -- small ads that are targeted to specific search terms. According to calculations by Rob Sanderson, an analyst with American Technology Research, Google has been earning 12 cents a search, compared with 8 cents for Yahoo.

Google makes more money because it uses math to figure out which ads are likely to get clicked on by Internet users, and it places them in the most prominent positions. Both Google and Yahoo make money only when someone clicks on an ad.

For years, Yahoo let advertisers bid for placement. A new advertising software upgrade Yahoo is rolling out is designed to mimic Google's approach.

The diverging strategies have had a dramatic impact on the two companies' bottom lines. Yahoo grew revenue a respectable 22 percent from 2005 to 2006, from $5.3 billion to $6.4 billion. But Google grew 73 percent from $6.1 billion to $10.6 billion.

"Yahoo lost against Google. At the end of the day, that's the only comparison that really matters," said a former senior manager who asked not to be identified for fear of harming business relationships.

Yang said he isn't giving up.

At a meeting with Yahoo employees Monday afternoon, he said Yahoo could still be No. 1 in search. "We need to figure out how to differentiate, and the way the current search game is being defined is not being defined by us."

According to Compete, an independent market researcher, average Internet users spend more than 11 minutes each time they visit Yahoo, compared with less than six minutes for Google and less than four minutes for Microsoft.

Bill Gossman, chief executive of Revenue Science, an advertising network, said Yahoo needs to make more effective use of the data it collects from users and to figure out ways to connect with those people when they are visiting Web sites that are not owned by Yahoo. "They have the strongest reach and engagement on the Internet," Gossman said.

Scott Rafer was chief executive of MyBlogLog, a start-up that was acquired by Yahoo in January. Rafer said Yahoo's data on users could bring success during the next phase of the Internet, which he believes will include highly targeted, individualized advertising.

"Just like any other company, Google is going to mature and decline," Rafer said. "What comes after search advertising? You can beat your head against the wall. Or you can plan for the future for when Google is a one-trick pony."

Contact Elise Ackerman at eackerman@mercurynews.com or (408) 271-3774.

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