Why Yahoo Might Never Be ‘Mobile’ Enough (YHOO)

by Jonathan Berr | July 28, 2014 9:05 am

When it comes to mobile, Yahoo (YHOO[1]) CEO Marissa Mayer has talked a good game, even speaking of what she calls a”mobile first” strategy.

Unfortunately, it’s largely been just that — talk.

Facebook (FB[2]) and Google (GOOG[3]) control a combined two-thirds of the mobile advertising market, which analysts are forecasting to rise on a global basis by a whopping 75% to $31.45 billion[4] this year alone. That comes as traditional banner advertising — which is how Yahoo earns most of its profits — wanes.

And that’s the crux of the problem: YHOO is basically trying to win a race where its much larger rivals have a huge head start.

Gaining ground in mobile will not be easy, though Yahoo certainly is giving it its best shot. Most recently, Yahoo recently acquired Flurry, a startup that provides ad targeting and analytics services, for about $300 million. Though, not everyone is optimistic about how effective this latest transaction will be.

“The company’s agreement to acquire Flurry could help position Yahoo as a source of app insight and in-app advertising, which would help them gain speed in the race for mobile display ad dollars,” said Dan Marec, a spokesman for market research firm eMarketer, in an email to InvestorPlace. “But it’s unlikely that Yahoo will be able to gain significant ground on Facebook or Google in the near term.”

Meanwhile, earlier this year, Yahoo launched Gemini, a set of tools that combine advertising efforts for both mobile and native ads — Advertising Age[5] says that Yahoo think Gemini will create a “one-stop shop” for brand markets looking to tap these markets.

Yahoo stock investors are watching the company’s mobile strategy closely for an indication of what Mayer will have to work with once the hype of the Alibaba IPO begins to fade, and the money made off the deal is in YHOO’s pockets. So far, Mayer has been lucky — Yahoo’s investment in the Chinese Internet company has boosted the company’s share price even as its core businesses stagnates.

Facebook’s recent blowout quarter highlights the challenges facing Yahoo. FB estimates that 654 million of its 1.28 billion active monthly users access its service over a mobile phone. Google’s Android operating system boasts more than 1 billion active users on mobile devices.

Yahoo’s 450 million mobile users, while nothing to sneeze at, pale in comparison.

To make matters worse, Yahoo also is having issues with its core display advertising businesses. Until a year ago, the Internet media company had a huge market share in display advertising. Google and Facebook, however, have gained ground in market that Yahoo had dominated for years; eMarketer estimates[6] Yahoo’s market share will drop to 6% from 7.1% a year ago — and that’s despite expected 23.8% growth in the market.

One reason why YHOO faltered was because of problems with its Right Media display advertising network that have festered for years. Oded Frommer, founder of Israel-based mobile app marketing network Performance Reviews, told InvestorPlace that as Right Media’s technology became obsolete, “fraud traffic and low quality campaigns … took over the majority of the activity there.”

“We believe that since this shift happened exactly during the beginning of the surge in mobile apps marketing that cleared the way for existing and many new exchanges and networks to take the lead on mobile traffic and left Yahoo completely out of this lucrative and fast-growing field,” Frommer said.

Yahoo’s rivals in the mobile space also use a cost per install (CPI) business model, which Frommer notes offers minimal risk for app developers, as it provides them a clear idea regarding how much it will cost them to get a user to install their mobile app. Facebook allows developers to pay on a CPI basis after they buy advertising using the more common cost-per-click basis. Google charges CPC rates, but since its traffic quality is high, app developers are willing to pay the higher costs, Frommer said.

“Yahoo has been left behind.” he said, adding that the company is overly reliant on CPM (cost per thousand impressions, or views) advertising traditionally used in banner ads.

“High serving costs (something that other networks don’t charge, at least not directly), and fraud traffic, all have made their advertising services not worth while, compared to alternatives such as Google and Facebook with their CPC model,” he said.

Bottom Line

Given the huge challenges it faces in the mobile market, look for Yahoo to make even more acquisitions in this space — it has to.

But make no mistake: Yahoo’s rivals have an enormous lead, and will be looking at the same companies to help them gain ground.

This is yet one more reason why investors should stay on the sidelines and not fiddle with YHOO.

Jonathan Berr does not own shares of the aforementioned stocks.

  1. YHOO: /stock-quotes/YHOO-stock-quote/
  2. FB: /stock-quotes/FB-stock-quote/
  3. GOOG: /stock-quotes/GOOG-stock-quote/
  4. $31.45 billion: http://www.theguardian.com/media-network/media-network-blog/2014/may/20/facebook-google-mobile-advertising
  5. Advertising Age: http://www.adweek.com/news/technology/yahoos-gemini-pairs-native-ads-and-mobile-search-155825
  6. eMarketer estimates: http://online.wsj.com/articles/facebook-results-keep-surging-on-mobile-ad-growth-1406146246

Source URL: https://investorplace.com/2014/07/yahoo-mobile-flurry-yhoo-stock/
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