TCS Daily

Attack of the Yahooligans!

By Dominic Basulto - March 19, 2004 12:00 AM

Make no mistake about it -- online search is now an enormously profitable business. In February, Forbes named Google co-founders Sergey Brin and Larry Page to its list of the world's 600 or so billionaires -- and that's even before the expected splashy Google IPO sometime later this year (at which time, one expects, they will become multi-billionaires). By some estimates, the worldwide search industry could more than triple in size over the next four years, becoming a $7 billion industry by 2007. Thus, it comes as little or no surprise that Internet companies like Yahoo are now embracing online search as a way to boost profitability and increase shareholder value. Yahoo, led by former Hollywood mogul Terry Semel, has been mounting a serious, sustained attack on Google. But are these efforts enough to topple Google as the reigning king of the new Internet boom?

In just the first 60 days of 2004, Yahoo has made five major press releases related to its new foray into the area of Internet search -- including the earth-shattering announcement in mid-February that it was jettisoning Google as its search technology partner and implementing its own algorithmic search engine. This announcement was then followed two weeks later by the equally controversial announcement that Yahoo was embracing pay-for-inclusion as a way for advertisers to guarantee that their pages will get indexed by Yahoo's search engine on a regular basis. Last month, Yahoo also announced the creation of a new corporate R&D unit devoted specifically to Internet search as well as the launch of new initiatives related to personalization, categorization and localization.

The important point to keep in mind is that Yahoo is attempting to do more than just overtake Google in the field of Internet search. If the battle is just over who has the most comprehensive search algorithm, Google is still the odds-on favorite to emerge as the victor. Even with Yahoo's acquisition of commercial search provider Overture Services and access to new features from companies such as Inktomi and AltaVista, most experts still give the upper hand to Google.

However, Yahoo CEO Terry Semel has something much grander in mind: to create the world's largest and most diverse online marketing platform backed by the world's most-trafficked Internet properties. In just the latest example, Yahoo is rolling out a new "SmartView" initiative in conjunction with its Yahoo! Maps functionality in order to sign up local advertisers and establish a beachhead in the area of "geographic search" services. The company is also working on a number of new search engine initiatives that will leverage other Yahoo properties (e.g. Yahoo! Travel, Yahoo! Product Search).

Even the pay-for-inclusion move was part of this broader, overarching strategy. While opponents of pay-for-inclusion warn that Yahoo's search results will become clogged with "search engine spam," Yahoo claims that the new pay-for-inclusion strategy will allow it to serve up more relevant search results. By indexing more Web sites on a more regular basis, Yahoo could be able to provide the most up-to-date and accurate information on the Web. Moreover, the company is rolling out partnerships with non-profit institutions such as the Library of Congress and National Public Radio in the hopes of charting more of the so-called "deep Web" (the parts of the Web that even Google can't reach). By establishing itself as the most comprehensive online search destination, Yahoo will be able to serve up more ads for local advertisers and build its total online audience.

The real question, of course, is whether Yahoo will now have the clout to convince advertisers to migrate en masse away from Google. By building out an online marketing platform -- rather than just an online search platform -- Yahoo hopes that the answer is yes. With a growing hoard of cash, Yahoo is now ready to re-invest in its online marketing platform, form deeper links with advertisers, and cut off Google at the pass before the company can launch its widely anticipated billion-dollar IPO.

Like all savvy executives, Yahoo CEO Terry Semel is keeping one eye on the bottom line and the other eye on the stock price. Shares of Yahoo have rocketed in value from $18 to $45 in the past 12 months, while the company posted the most successful quarter in its entire history in the final quarter of 2003: revenues of $664 million, gross profit of $443 million, and free cash flow of $92 million.

Internet companies are no longer cute lab projects in garages -- they are billion-dollar businesses with shareholders, business partners and customers. By redoubling its efforts in the field of Internet search, Yahoo hopes to satisfy all three of these constituencies. Shareholders will be rewarded with a higher share price, business partners will be rewarded with more effective advertising campaigns, and Web searchers will be rewarded with more relevant search results and greater access to previously untapped areas of the Web. If Yahoo can maintain this momentum in 2004, it looks like the daring attack on Google might just pay off.

Dominic Basulto recently wrote for TCS about the 99-cent technology store.


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