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Yahoo!CaseAnalysis

May 9

The strategy of implementation of an established dot com company, strugglingto leverage current advertising methods with business object ives.

Jason DrohnBradley BiererCarol WoodsMichelle VictoryPaul Rapela

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Table of ContentsExecutive Summary 3History: 5Problem 7Competit ive Analysis 9Yahoo Financials 12Econom ics 19

Demographics 23Market Analysis 30CPM 34SWOT MATRIX: 36QSPM 38Space Ma trix 39Strategic Issues 42Stra tegy Implementa tion 47

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Executive SummaryYahoo has grown up as a portal company. They learned early on that by being sticky, by

having a web presence that forced users to stay on their site, they could find ways to profitfrom the page views. This has led Yahoo astray though. Not only has Yahoo given up overallprofits in search of ever expanding user acquisition, they have allowed their search product tofall behind.

Google, Yahoo's chief competitor, has mastered the art of monetization, namelythrough contextual advertising. Contextual advertising is when a small piece of programmingcode is inserted into web pages which actually interprets the text and serves advertising basedon keywords. Google's offering, Adsense and Adwords, produces 99% of the company's profits.This advertising network is built into both their search and branded sites. Web publishers arealso growing to adopt Google's version of website advertising to gain monetization for theirown traffic.

Yahoo has adopted this model of contextual advertising that has been so profitable forGoogle, but have yet to refine it enough to make a serious impact on the market. The programis still in beta (the internet's way of saying under-construction) and has not made any headwayat attracting new publishers or advertisers.

The primary disconnect in the Yahoo model has been the lack of precision, because theirsearch algorithm needs to be updated. The ad network fails to interpret that an article iswritten about cars, and serves ads about entrepreneurs. Money is only made if a user clicks onthe advertisements. This is an interesting dilemma.3

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On the positive side, Yahoo has a brilliant banner serving system. Since Yahoo still seesitself as a portal, it still leverages Yahoo Money, Cars, Email, etc. Each of those sites hasproducts or services that provide value to the user. A user shopping for cars is later targetedwith banner ads reflecting the cars that they were viewing online.

In our estimation, Yahoo needs to focus on core content by improving exactly what it isthat makes them money. They should focus on improving their ad network's efficiency andallowing all publishers admittance. They should leverage their banner serving software withthe contextual market and provide growth that way.

Google, the market leader, is simple and built around search. Yahoo needs adopt a likephilosophy to remain competitive in their market.

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History:Yahoo! Incorporated is an Internet service provider that serves both users and business

globally. The company was founded in 1994 by David Filo and Jerry Yang who were attendingStanford University's PhD program (The History of Yahoo!). Yahoo! Inc. began as a hobby forFilo and Yang and has now evolved into a multifaceted brand that serves internet usersworldwide (The History of Yahoo!). Yahoo! Inc. has become the world's largest global onlinenetwork of integrated services (The History of Yahoo!). According to the Yahoo! Inc. website,they have become one of the leading search engines on the World Wide Web (The History ofYahoo!).

Yahoo! Currently has 500 million users worldwide that visit the site each month. Yahoo!is provided to users in more than twenty different languages (Yahoo! Inc). The company alsohas office locations in Europe, the Asia Pacific, Latin America, Canada and the United States(Yahoo! Inc). Yahoo! Inc. is currently headquartered in Sunnyvale, California (Yahoo Inc).

Yahoo! Inc. was incorporated in California in March of 1995 (Yahoo! Inc). Yahoo! Inc.first went public on NASDAQ in April of 1996. At this time Yahoo!'s stock opened for $13.00 pershare (Yahoo! Inc.). At the close of its first day of the IPO,Yahoo! stock had reached a closingprice of $33.00 per share (Yahoo! Inc). At this time the company only had 49 employees(Yahoo! Inc). The company was then reincorporated in Delaware in May of 1999 (Yahoo! Inc).In December of 1999 Yahoo! Stock was added to the S&P 500 (Yahoo! Inc).

In 1996, Yahoo! Inc. began entering into joint ventures with SOFTBANK(Joint Ventures).Through this initial joint venture, Yahoo! Inc. was able to create Yahoo! Japan. Subsequently5

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Yahoo! Inc. has teamed with SOFTBANKto create markets in Germany, United Kingdom,France, and Korea (Joint Ventures). Yahoo! Inc. and SOFTBANKhave also created GeoCitiesJapan Corporation to create and manage a Japanese version of the GeoCities website (JointVentures).

Yahoo! Inc. has also teamed in a joint venture with VISA to establish Yahoo!Marketplace (Joint Ventures). This joint venture occurred in August of 1996 and has since thencreated a navigational service focused on information and resources for the purchase ofconsumer products and services over the internet (Joint Ventures). This joint venture alonecreated a new market for Yahoo! Inc (Joint Ventures).

Most recently, in January 2006, Yahoo! Inc. and Seven Network Limited, also known asSEVEN,have teamed in a joint venture as well (Joint Ventures). SEVEN,an Australian mediafirm, signed an agreement with Yahoo! Inc (Joint Ventures). In this agreement, Yahoo! Inc(Joint Ventures). contributed its Australian internet business, Yahoo! Australia and NewZealand, and SEVENcontributed its online assets, television and magazine content (JointVentures). Yahoo! Inc. has a fifty percent equity ownership in the joint venture which willoperate under the name Yahoo7 (Joint Ventures).

Yahoo! Inc. also operates Flickr, a photo sharing and storing website (Yahoo! Inc profile).

The company also provides its users with web mail, instant messaging, music, video, personals,and much more (Yahoo! Inc profile).

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ProblemYahoo is a master of portals, but they have let their search product suffer. They have

long built out their offering in such a way to add value to their users through functionality whilethey hoped that revenue would be made in the process. There was no clear attempt to eithertarget those users with advertising or extend any real value added services.

This portal terminology has run so deep that it is engrained in the Yahoo culture. Searchis a product of users making their way through the Internet, rather than the core of theirbusiness. Yahoo sees their core business as being Yahoo News, Finance and Mail. They havemade acquisitions such as MyBlogLog and Flickr. For what though? To extend functionality orto increase revenue.

The all inclusive Yahoo is counting on the traffic to be monetized through privateadvertising deals and partnerships. Partners usually pay to have their service included in theYahoo Directory in one form or another. These joint partnerships are encouraged because itnot only brings Yahoo recurring revenue, but allows the partner a strategic place in the Yahoonetwork. The partnering service typically sees a boost in traffic, thanks to being networkedwith such a big web presence.

Private advertising comprises the other side of the revenue deal. Private advertising issuch that a company may put their banner in a prominent location of the Yahoo network.Similar to partnerships, the private sponsors are limited to the banner placements that arebought. For example, Newegg.com, a well known computer retailer, might put a banner ad on

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the Yahoo home page for $50,000 a month. This banner ad is then targeted to each and everyuser who enters the Yahoo home page.

The problem is that web publishers, those that own their own websites are not able tocapitalize on this revenue model. Yahoo promotions are concentrated to being served onYahoo's pages. Publishers do not have a chance to leverage Yahoo's size and revenue potentialthe way that Google has empowered their users, through the contextual ad system.

Yahoo is the most trafficked website on the planet. More pageviews are served from

Yahoo servers than any other company in the world. Why is it that they are trailing Google inrevenue then? Because Google allows other publisher's to maximize the ad network. 82% ofGoogle's revenue is achieved not on their site, but on other web publishers.

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Competitive AnalysisAs taken from the Yahoo 10K, "We primarily compete with companies to attract users to

our website and advertisers to our marketing services. We expect the market to becomeincreasingly competitive if online marketing continues to grow and gain acceptance on a globalbasis."

CompetitorsDIRECT COMPETITOR COMPARISON

YHOO Pvt1 GOOO Pvt2 I ndtl5!! : l1:MarkefCap; 37.698 NfA 150.318 N/A 168.57MEmplays.es: N fA NIA 10,674 NIA 142Q ld y Re v G row th (yay): 13.40% NIA 67.00% N/A 19.20%Rev en ue (tim ): 6.438 9.2881 10.608 2.3082 5 2.1 1 MG ro ss Mar gin (tim): 58.46% NIA 60.33% NJA 6263%E81TDA ( ttm ): 2.028 N/A 4.588 NJA 1.S4Mo perM argins (tim): 14.64% NIA 33.48% N/A 7.66%Net tncorne (ttm ): 751..39M NIA 3.088 NJA 1.74MEP S (t im): 0.515 NIA 9.942 N iA 0.05P IE (tim): 53.94 NIA 48.62 N iA 43.05PEG (5 yr expected): 2.23 NIA 1.02 NfA 1.60PtS (tim): 5.70 NIA 14.15 N/A 3.57p",u '"AOt LtC. (pri~atel\l held)Gooe : '" Google Inc.P",t2 .: MSt'! (.pri~.atel~ held)Indus" '"Int,ernet lnfo'rmation Pr,o\liderst = As of 2005 2 = As of 2006

Yahoo's primarycompetitors are Google,AOL, and MSN. All ofwhich compete in theindustry of "InternetInformation Providers."However, because AOL isheld as a limited liabilitycorporation and MSN is adivision of Microsoft,data is not readily

available for either section. This critique will have elements from both companies, includinginformation taken from Microsoft's 10K report and AOL's few public records.

The first key difference to note is the fact that each company differs in its primarycompany beliefs. Yahoo sees itself as a portal "to connect people to their passions, theircommunities, and the world's knowledge {Yahoo 10K)." Google's maintains the largest, most9

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comprehensive index of web sites and other content, and makes this information freelyavailable to anyone with an internet connection. Their automated search technology helpspeople obtain nearly instant access to relevant information from our vast online index (Google10K)." Microsoft's offering, MSN, "provides personal communications services, such as emailand instant messaging, and online information offerings such as MSN Search, MapPoint, andthe MSN portals and channels around the world (Microsoft 10K)." AOL is simply an internetservice provider who combines the leverage of the Internet with its own branded services.

Although each of these competitors has aligned themselves in the same sectorinvestment wise and serve the same relative target markets, they define their servicesdifferently. In some sense, this demonstrates how they align their business model as well.Google lives by its advertiser network, also known as the Google Network, comprised ofAdwords and Adsense. The combination of the two services provides Google with 99% of theirrevenue. The revenue may be further divided between 18% on site advertisement and 81% offsite advertisement. Adwords is an online application that allows businesses to publish their adsto the many websites that participate in the Google Network. Adsense is the destination forweb publishers and site owners who have space on their website for ads. The webmastersmake money every time a Google ad is clicked. Google is essentially the middleman.

Yahoo takes a different alternative to the system. Being the most trafficked website onthe planet, Yahoo sells ads for its own network of sites. But as the 10K notes, Yahoo sees itselfas a gathering place for people to connect with their passions. Yahoo's specialty 'pre-Google'has been monetizing its own web pages.10

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Yahoo's ad network has proven effective on the front of intelligent ad serving. Thealgorithm is built in such a way that it can see where a visitor is going online, within the Yahoonetwork, and serves ads based on those tendencies. For instance, if you are looking at a car inYahoo Autos and travel to Yahoo Money, you will see a car advertisement. This data is storedfor an indefinite amount of time, so in three months a random car ad may show up again.

Yahoo has only just recently launched an Adwords and Adsense competitor though.Yahoo's service is named Yahoo Publisher Network. Yahoo Publisher Network allows the samefunctionality that the Google Network does, but is currently in beta. The company has yet tosolidify its stance in the market concerning the advertising software.

As Yahoo states in their 10K, "The principal competitive factors relating to attracting andretaining users include the quality and relevance of our search results, and the usefulness,accessibility, integration and personalization of the online services that we offer as well as theoverall user experience on our website. In the case of attracting advertisers, the principalcompetitive factors are the reach, effectiveness and efficiency of our marketing services as wellas the creativity of the marketing solutions that we offer."

They also add, "We believe that we are effectively competing in the Internet servicesmarket as we continue to refine our search technology, build onto our existing online

properties and services, and further improve our users' experience."From this, one may conclude that Yahoo services playa key role in attracting and

retaining users. Whereas, Google has recognized that search is their primary objective.

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Yahoo Financia1sYahoo trades on the NasdaqGS under the symbol, "YHOO." For slight comparisons, to

show where Yahoo needs to be, we are going to compare several key statistics with Google'sresults.

With a 52 week range of 22.65 to 28.86 and a volume of 21,102,256; the stock itself iswell traded. The current PIE of 55.57 seems high, especially when compared to the much moreprofitable Google; which has a PIE of 48.18.Here is a snapshot of the top level financials for Yahoo at the time of writing:YAHOO INC (Nasd.rqGS:YHOO) Delayed quote dataAller Hours: 28.32 .. 0.02 (0 .08% ) as of 7 :35pm ET an 04J27107Last Trade: 28..34 Day's Range: 28.1728.86Trade Time: Apr 27 52wk Range': 22.6534.00Volume: 21,102,456"0 ..15 (0.51%)

28.48928.26

PrevClose: A vg V ol (3m): 22. '985.500Open::SId: N /A

28.64 x 20033.48

Market Cap:PIE (ttm):EPS (ttm).:

38.45855.57

Ask:1YTa rg et E st: O iv & Y ie ld :

0.51N /A ( NJA )

Across the top level, revenue has been strong as well since 2002. 2006 revenues come in at6,425.7 (in millions). Looking at the company snapshot:Yahoo YHOO

ReYenue (r:rom 1997 to 2'0'06) $Mil Fiscal year- end: Oe~;ember6425.69 , .5354. 73................. , , ..

3212 ..9,4... .. .... , .2141 ,.99.......,,., .. ......,......,.... , ,,., , .

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However, in terms of Google, Yahoo's chief competitor, there is a discrepancy. Google grewrevenues to 10,604.9 (in millions) since the time of IPO offering in 2003. There revenue is asfollows:Google GOOG

. 10 V , ,. !nc~ome 10Yr Ca.sh Flows Quarterly Results

Re...enue (from 1997 to 2006) $Mi! Fiseal \lear e nd 1 Decembe r

1767.49, .NA NA NA NA NA NA NA

10604.92" , ,. .8837.43>...................................................................................................................7069,9S, 1 . 5302.4 6,' , , .3534.9'7' ., - , ,.

Key Ratios:Profitability - Upon further examination of Yahoo, the key ratios include:Yahoo YHOOr p.".,fil%) 6.70% 5.85% 3.79% (3.99%) 1.66% 5.45% 11.11% 18.95% 6.73% 6,,73%Flnanda~'Leve" ..9 e 1.14 1.10 1.16 1,10 1.20 1.22 1.30 1.33 1.23 1.26 1.26(Average)Retu ... . "" Equity (20.7S%) 7.92% 6.80.% 4.47% (4.80%) Z.OZ% 1.07% 14.73% Z4.Z3% 0.48% B48%

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Cost of goods sold has increased as one might expect, throughout the ten year span ofpublic trading. This is largely due to the increase of server space and supplemental acquisitionsthe company has made. These acquisitions include services like Flickr and MyBlogLog.

Research and development is sitting at 13% in 2006, which is higher than Google's(which comes in at 11.6%). This is a positive mark for Yahoo.

The EBT,or earnings before tax, as dropped to 17.1% - from 48.4%. This is a cause forconcern. Google's stands at 34.9 to 37.8 fo r the last two years.

In dropping to the profitability section, Yahoo's tax rate is 41.7%, up from 30.2%. This isnot the highest it's been, though. In 2000 it was 72.7%. Google sits at 23.3%.

Perhaps the biggest discrepancy I can see is that Yahoo's return on assets dropped from18.95% in 2005 to 6.73% in 2006. Google remains strong at 21.41%.

Yahoo Growth rates are the most alarming section in this analysis though.Growth Rates-Yahoo's growth rates are as follows:Yahoo YHOQ

Profitability Gl'Qwth Rates cash Flow Flnanc;",1Health Efficiency RatlQsGt'Owth

1997 1998 III 1 1 1 1 1 2'000 200 1 208.2 280:3 208420'05 2'00,6:latestQb-Revenue GrowthYear ou'erYear3Year Average5-Year Allerage10-Year A",erageOperating IncomeYear o~er Year3'Yea'r Auera.ge'S-Year Average10-Year Average

253.4%201.5%189.6% 8:3.6%(35.4%)32.9% 70.5%120.0% 47.1% 22.2%.-. 213..7%154.4% 52.3% 17.4% 13.5% 70.8% 76.7% 58.1.%

--- 106.6%69.9% 51.6% 43.4% 36.5% 55.0%79.0%

13.4%

--'132 ..0%346.3% --- 235,3% 132.9% 60.9'%(15.1%) (6.4%)9.7% (0..2%) ---132.5% 47.1%

59.4% 59.5% 30.1%

EPSYear over Year3'Year Average:;i'Yea,r Ave.rage10-Year Ave.rage

81.8% 20.0% ---105.6% 213.5% 120.7% (5904%) (58.7%)--. 21.6%45.6% -'-142.3% 41.1%

46.4% 63.3% 84.4%

As pictured above, Yahoo had amazing growth in the late 90's and in 2003 and 2004.However, Google was has stormed on the scene, taking the search and advertising market thatpreviously served with banner ads. You can see this reflected in Yahoo's falling numbers.14

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Google introduced pay per click services which are the bread and butter of the new searchgiant.Google's growth:

Google GOOGProfitabilitv fG!"Owth Rate!> L Ca~ Flow Finandal Health efficieno;:".Ra,tios

Revenue G!"OwthYear over Year3-Year AlJerage5-Yeaf AIJerage10-Y'ea!r AIJe'rageOpe:rating IncomeYear oYer Year3-Vea" Average5-Vear AIJerage10-Year Alle'rageEPSYear oller Year3-Vsar A',ElragE!5-Year AYerage10-Yea'r Average

---117.6% 92.5% 72.13%9'3.4%

67.0%

86.9% 2:15.1% 76.0%---11.8.0%

86.2%

--- 256.1% 243.8% 98.0% 170.5%---16904%

Google, having their initiallPO in 2004 has grown exponentially. 2004 was a big year forinternet adoption, and the first year Yahoo had a true competitor. Since then Yahoo has fallento 47.1% growth and 22.2% growth in 2005 and 2006, respectively. Even in the last quarter,Google posted a 67% increase, while Yahoo sank to a 13.4% increase.C a sh F low-Yahoo's Cash Flow:Yahoo YHOO

FI"""da I He a'ith Hficl en,,~ Ratios

1997 1990 1999 2000 ,200I 2002 2003 20,04 200S 2006 TTMOperating Cash Flow Growth-YOY 616,3% 96.2% 135.6% (19.0%) 183.1% 41,,6% 154.6% 57.0%(19.9%)Free Ca.h Flow 'Growth-YOY 69.6% 149.0% (95.0%) 23,9% 171.7% 54.3% (47.6%)Cap E~ ~,> a % of Sal e s 9,8% 5.9% 8,4% 8,5% 12,0% 5.4% 7,2% 6,9% 7,8% 10,7% 10,7%Fr~'e c".h Flo~ls"I~. (S,13%) 48.39% 28.34% 37,41% 2.88% 2'6,,33% 19.13'% 23.62% 24,77% 10,62% 10.62%F',~"e Cash FlowlNet Inccrne 0.15 3.84 2.73 5.87 (0.22) 5.86 1,31 1.01 '01,69 0,,91 0.91

Yahoo's operating cash flow was down last year, -19.9%, and their free cash flow growthyear over year was down -47.6%. This could be because of several high priced acquisitions.

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Google's Cash Flow:Goog[e GOOGProfitabilit~ G,o .. th Rates I C"sh flo'" 1 Financial Health Effkle'\C~ R"tio~

Op e,ra'ting C ash 1 " 1 ' 0 " G,'ro'wth-YOYFree Ca.h Flo" G,owth-YOYCap Ex a. s' %of SaJe~Free Ca.h Flo. ./Sale .Free Ca.h Flow/Net In,,,ome

nYl 199,8 1999 2000 2001 20,02 200,9 2004 2'0,0,5 200fi TI~I147.1% 15,1.7% 45.&%

1

- - - I - - - I - J 20,1.0,% 14&.4% 3,5%- - - - - - I - - - - - . - 12,1% 10,.0,% 13.7% 17,9% 17.9%- - - 14,92% 20.63% 26,,41% Ui. 82%'15. 82%2,07 1.&5 1,11 0.5:> 0.::!:5Google didn't have a stellar year, in regards to cash flow and in comparison to their last

couple, but they still remained in the positive, sitting at 45.6%. That number may have beenreduced because of the YouTube acquisition.

Financial Health-Yahoo's financial health is a point of concern, because their cash and short-term

investments have been decreasing year after year. Accounts receivable inventory has remainedconstant, and their current assets has been around 2% for the last five years.

In regards to total current assets the company has noticed a drop year over year in TotalCurrent Assets, landing at 32.6% in 2006. Intangibles and Long Term Assets are at 29.3%though. I would imagine these stem largely from their offices and datacenters spread aroundthe world.

The largest concerning factor in this financial analysis is the debt of Yahoo, as comparedwith Google. Yahoo has .9% Accounts Payable, but 9.1% of Accrued Liabilities and 2.8& ShortTerm Liabilities. Their Long Term debt is at 6.5% which they just picked up in the last 4 years.

Altogether, Yahoo's liabilities total is 20.4%, leaving the stockholder's equity at 79.6%This might seem like an advantage to some, because they are leveraging debt to magnifyearnings, but if you continue further down, the current ratio is 2.54 and the quick ratio is 2.4.The company isn't going bankrupt, but has been trending down badly in the last four years.

Google on the other hand demonstrates only 7.8% liabilities, allowing the other 92.2%to be owned by the stockholders. They have a Current ratio of 10 and a quick ration of 9.63.

The following two pages offer printouts of the full financial statistics.16

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Yahoo's Financial Health:Yahoo YHOO

Growth Rates c ash Flo'w' Financial He,alth Efficiency Rat;,o!

------- "--- --------19'97 1'990 1999 2000 2001 2002 2003 2004 2005 2001> lates' t Qb-

Cash 8.Short-Term 63.7% 69.7% 59.4% 49.4% 38.9% 27.7% 22.1% 38.3% 23.6% 22.6% 22.6%Inye'$tmentsAccts Rec 7.7% 4.0.% 3.7% 4.0.% 2.9% 4.1% 4.8% 5.2% 6.7% 8.1% 8.1%Inve'~tor~Oth ..r Ccm,ent 4.2% 1.4% 1.3% 3.5% 2.4% 2.9% 2.2% 1.1% 1.5% 1.9% 1.9%Asset.Total Cu"..""t ti4.4% 44.2%~,.S% 7S.I% S6.9% 34,.8% 29.,0% 44.6% 31.,8% 32.6% 32.'5%A55et!;Net PP&S 5.0% 2.4% 4.0% 4.8% 5.5% 13.3% 7.6% 5.8% 6.4% 9.6% 9.6%Intanglp'les 18.3% 38.0% ,'13.0% 31.7% 29.3% 29.3%Other Long,-Te'rm 19.5% 22.4% 31.7% 38.3% 50..3% 33.6% 25.4% 16.6% 30.0.% 28.6% 28.6%As,setsTotal ""55e1:5 100.0% 100.0% 10.0,.0,% 100,.0% 10.0.,0'% 10,0..0,% 100.0% 100.0,% 100.0% to.O.O% 100 ..0%Accts Paveble 3.3% i.o.% 0.9% i.l% 0.6% 0..7% 0..5% 0..5% 0..6% 0..9% 0..9%Short-Term DebtTax"", PayableAcc~u,ed U~bilitie. 8.8% 5.5% 6.0% 7. 4'l!. 9.9% 9.2% 8.2% 9.3% 7.6% 9.1% 9.1%Other Short-Term 4.4% 6.3% 6.2% 5.2% 4.6% 4.9% 3.2% 3.0'l!. 2.8% 2.8% 2.8%Liabiliti,esTotal Cu".."nt 16_5% 12.9% 13.1% 19',.7'% 15.1% H.:S% 11.9% 12.9% 11.1% 12.8% 12.8%UabilitiesLon~-Term Debt 12.6% 8.2% 6.9% 6.5% 6.5%Other Long-T ..rrn 0..5% 0..9% 1.1% 2.1% 2.3% 4.2% 1.9% 1.6% 2.9% 1.1% 1.1%Liabilitieslo tal Uabilities 17.0:% 13.8:% 14.2,% 16,.4% 17.3% 18.9:% U.4% 22.6,% 20.9% 20.4% 2:0.4%TotalStoc,kholde,..,;" 82,..7% 81.1% 73,.,6% 7],.,4% 7'9,.,1% 79,..6% 7'9,.:6%Equity.otal Uabilities a

100.0'% 100.,0% 10.'0.0% 100.0% 100.0% 100.0%Eq,uity 160.0% 100.0% 100.0% 100.0% 100.0%

Liquidity / F",anc,al Health1997 1'990 19'99 2000 ,2001 2002 2003 2004 2005 :200ti, la,test Qb-

Current Ratio 4.57 5.84 4.':12 4.15 2.93 2.36 2.43 3.46 2.86 2.54 2.54Quick Ratio 4.32 5.73 4.82 3.89 2.78 2.16 2.25 3.38 2.73 2.40 2.40Fln.and~1 1.21 1.16 1.17 1.20 1.21 1.23 1.36 1.29 1.26 1.26 1.26LeverageDebt/Equ,ity 0.17 0.11 0.09 0.08 0.08

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Google Financial Health:Googl,e GOOG

Fina nc jal H .. .. lt h I Efficiency Ratio.rof I ta b iTlt.,.e..lance Sh .... tItems (in % Terms)

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EconomicsEconomics is defined as, "the social science that deals with the production, distribution,

and consumption of goods and services and with the theory and management of economies oreconomic systems." There are many factors and indexes that are tracked to gauge the health ofthe economy. These include gross domestic product, consumer price index, and strength of thedollar, interest rates, and disposable income.

Yahoo, Inc. relies heavily on accurate information pertaining to all these factorsassociated within our economy. Not just what the consumer is spending, more importantly howthe economy is doing as a whole. Yahoo's expenditures by advertisers tend to be cyclical,reflecting overall economic conditions and budgeting and buying patterns. Since Yahoo derivesmost of their revenues from advertising, any decreases in or delays in advertising spending dueto economic conditions could reduce their revenues or negatively impact their ability to growtheir revenues. Yahoo relies on the value of their brand and a failure to maintain or enhancethe company brands in a cost-effective manner could harm their operating results. (10K) Yahoobelieves that maintaining and enhancing their brand, specifically those that contain the Yahooname as well as those that do nothing, is an important aspect of their efforts to attract andexpand their user and advertiser base.

Yahoo has spent considerable money and resources to date on the establishment andmaintenance of their brands in which they anticipate spending increasing amounts of moneyon, and to devote much greater resources strictly towards advertising, marketing and otherbrand-building efforts to preserve and most importantly enhance the consumer awareness of19

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their brands. The success of Yahoo is depended upon us, the consumers and much money weare willing to spend on the Internet.

Spending and the availability of monies is not just a major concern with Yahoo, it is withall other Internet Service Providers. The fear is the increase of CPI indexes and the possibility ofinflation. The consumer price index (CPI) is a tool used to gauge the economy. The CPI is mostcommonly used to measure inflation, and businesses use it as a guide in making economicdecisions The CPI is an index of prices used to measure the change in the cost of basic goodsand services in comparison with a fixed base period.(American heritage dictionary) The CPIincludes all goods and services purchased by urban households. The prices that are used tocalculate the CPIare taken from 87 urban areas throughout the country.

The CPI is computed as a percentage of the cost of certain products as compared to abase year. (The American Heritage" Dictionary) The current base year is 1982-84, which equals100 percent. Any number above 100 indicates that prices for that year are higher than in thebase year. The most current CPIstatistics from the Bureau of Labor Statistics (BLS)are forFebruary 2007. During February 2007, the CPI rose by.5 percent to a level of 203.499. Thisfigure means that consumer prices for February 2007 were 103.499 percent higher than in thebase year. This was an increase of 2.4 percent since February 2006. The CPI is divided intoseveral different sections. Sections include housing, food and beverage, transportation, andenergy. The index for food and beverage increased .8, housing .4, transportation .1, and energy.9 during the same time period.

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When consumer prices rise, everything else seems to follow. The increases will affectYahoo's business relationships with the third-party content providers, which will becomecritical to their success. As competition for compelling content increases the prices at whichthey offer their content to them and potential content providers may not offer their content toYahoo on terms that can be agreeable to them. An increase in prices charged by the thirdparties to them could harm their operating and financial condition. Further, many of Yahoo'scontent licenses with the third parties are non-exclusive. Accordingly, other webcasters andother media such as radio or television may be able to offer similar or identical content. Thisincreases the importance of their ability to deliver compelling editorial content andpersonalization of this content for users in order to differentiate Yahoo from Google and MSN.If Yahoo is unable to license or acquire compelling content at reasonable prices, if Google, orMSN broadcast content that is similar to or the same as that provided by Yahoo, or if they donot develop compelling editorial content or personalization services, the number of users oftheir services may not grow as anticipated, or may decline which could harm their operatingand financial results. (10K)

Interest rate changes will affect the operating expenses of Yahoo, their third- partyaffil iates' and their competitors. Interest rates are contro lied by the policy ma kers of theFederal Reserve Board.(FED) The rates established by the FEDare used by banks and lendinginstitutions to set the interest rates for loans and credit cards. By manipulating the federalfunds rate, the FEDtries to control inflation and keep the economy strong while preventing arecession. The FEDsets this rate at a level to keep the financial and monetary conditions of the

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economy in line and adjusts the rate for changing economic conditions. A change in these ratesby the FED,or the expectation of a change, can trigger changes to the short term and long terminterest rates, the foreign exchange value of the dollar, and stock prices. Changes in these ratesaffect the spending decisions of both households and businesses.(federalreserve.gov)

The FEDraises the federal funds rate to slow down economic growth and curb inflation.They lower the rate to stimulate a sluggish economy and encourage growth. Since June 2006the federal funds rate has been stable at 5.25 percent. During the prior two years, the FEDhasraised the federal fund rate 17 times. Should we be concerned? Should Yahoo, Google andothers be concerned? Yes, as noted earlier when the cost of items increases so will others soonto follow. The increase in interest rates will affect the anticipation of Yahoo's much neededexpansion into the world of cyberspace.

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DemographicsInternet World Stats (2007) reports as recently as March 10,2007, Yahoo! has a

potential global customer base of 1,114,272,426 people who access the Internet. The usagegrowth period charted is for the years 2000-2007. Of the data presented Asia, Europe, and theUntied States are the three top users of the Internet globally. Africa, Asia, Middle East, andLatin America/Caribbean reflect the largest usage growth while North America reflects thelowest growth percentage rate globally in the charted period.

WORLD INTERNET USAGE AND POPULATION STATISTICS% UsagePopulation Internet Population Usage

World Regions Population %of Usage, ( %of Growth(2007 Est.) World Latest Data Penetration World 2000-) 2007

IAfrica 933,448,292 114.2% 33,334,800 FI3.0% 638.4%%IAsia 3,712,527,624156.5 % 398,709,065 110.7% 1~8

248.8%%

IEuroee 809,624,686 112.3% 314,792,225 138.9% 128.3%1~9.5IMiddleEast 193,452,727 F 19,424,700 110.0% 11.7% 1~1.4INorthAmerica 334,538,018F33,188,086 169.7% 120.9%1~~5.7~ 556,606,627F6,386,009 F18.7 % 1~3.4America/CaribbeanOceania / Australia 34,468,443 F8,439,541 153.5% 11.7% 1~2.0IWORLD TOTAL 6,574,666,4171100.0 % 1,114,274,426 FI~~o,o 1~~8.7NOTES: (1) Internet Usage and World Population Statistics were updated on Mar. 10,2007. (2) CLICK on each world region for detailed regional information. (3)

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Demographic (Population) numbers are based on data contained in the world-gazetteerwebsite. (4) Internet usage information comes from data published by NielsenllNetRatings, bythe International Telecommunications Union, by local NICs, and other other reliable sources. (5) Fordefmitions, disclaimer, and navigation help, see the Site Surfing Guide. (6) Information fromthis site may be cited, giving due credit and establishing an active link back towww.internetworldstats.com. Copyright 2007, Miniwatts Marketing Group. All rights reservedworldwide.

Internet World Stats (2007) illustrates that North America had the lowest usage growthrate by world region, but does reflect the highest Internet global penetration.

Internet Penetration by World RegionNorth Am.erica 69.7

Australia/Oceanta

LaTil1Ame-tica

Asia

Middle East

Africa

o 10% 20% 30% 40% 50% 6-0% 70%PenetratIon R.ate (% Population)

Copyright www.lnternetworldstats.com - Mar 19I 2007

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.80%

http://www.internetworldstats.com./http://www.lnternetworldstats.com/http://www.lnternetworldstats.com/http://www.internetworldstats.com./

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Internet World Stats (2007) presents the following pie chart of the world Internet user.World Internet Users A frica Asia Europe Latin America Middle EastNorth America

,. Oceania/AustraliaCopyright 2007, www.internetworldstats.com

The World Bank Group (2007) charts internet user data. The user data can bedisaggregated into many forms of information such as: gender, age, frequency, and householdincome. The available information on the use of the Internet globally is inadequate in scopedue to the limited number of countries which collect information and communicationtechnology making it difficult to ascertain the market for global Internet industry (pg. 1).

The United States provides the most information on the use of the Internet in the NorthAmerican Region. The following World Band Group graph was last updated January 11, 2007.

Demographics of Internet UsersBelow is the percentage of each group who use the internet, according to ourDecember 2006 survey. As an example, 69% of adult women use the internet.

Use the internetTotal Adults 70%Women 69

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Men 171Age18-29 83%30-49 8250-64 7065+ 33Race/ethnicityWhite, Non-Hispanic 72%

Black, Non-Hispanic 58English-speaking Hispanic 69Household incomeLessthan $30,000/yr 49%$30,000-$49,999 75$50,000-$74,999 90$75,000 + 93Educational attainmentLessthan High School 36%High School 59Some College 84

College + 91The Pew Internet Organization (2007) provides valuable information on the

demographics of Internet users in the United States. The information reveals a large block ofthe U.S. populace which actively uses the Internet. The largest segment of the U.S. populace is26

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the 18-29 age groups with an 83% usage rate. Following closely behind are the 30-49 agegroups with an 82% usage rate and the 50-64 age groups reflecting a 70% usage rate. Race andethnicity reflect percentage rates of White's as the largest users of the Internet (pg. 1).

American demographics (2007) says the Hispanic race is the fastest growing populationin the United States. Changes in the Hispanic race have increased by 3.3% between 2004 and2005 (pg. 12). Combing the American demographics (2007) and the information drawn fromthe World Bank Group (2007) chart data reveals, the Internet segment for the Hispanicpopulace is expected to grow as Hispanic's trail only slightly in the percentage rate of Whiteusers.

The World Bank Group (2007) chart reflects nearly half of the households with less than$30,000 in household income use the Internet. The usage rate does rise upward as thehousehold income increases. The income level tops out with a 93% usage rate for householdincomes of $75,000 plus. According to American demographics (2007) the average familyincome is $46,326 per year (pg. 2). Combining the American demographics (2007) data andthat of the World Bank Group (2007) reflects that the Internet user rate in the United States isat 75%, as of January 11,2007.

The World Bank group (2007) charts shows Internet usage increases dramatically with

the amount of formal education the user possesses. The users with less than a high schooleducation are the lowest Internet users with only a 36% participation rate. More than half ofthose with a minimum of a high school education, 59%, use the Internet. Usage of those with

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some college has an 84% user rate. The chart tops out with users with a college plus educationhave an impressive Internet usage rate of 91%.

According to the iNetShops (1998-2005) information page over 55% of the users accessthe Internet from their home computers. The 50 plus group is the highest age group whichpays for their Internet access at home; other users are more likely to gain access to the Internetat work or at school. Interestingly, this reflects why the internet usage is 20-30% slower onweekends and the busiest days are Monday-Thursday. About 72% of the female and 87% ofthe male Internet users will access the web everyday. Nearly 45% use the web 1-4 times a day;while 41% claim more frequent use and 15% say they use it less.

The iNetshops (1998-2005) research also reveals that the martial status of the Internetuser is 40% married and 41% unmarried. The age group of 25 and under is about 75% single,whiles the age group of 50 plus is 75% married. The political affiliation of the American Internetuser leads towards the Democratic Party, 25%, over the Republican Party, 21% of thosesurveyed.

In summary, the demographics of the World Bank Group (2007) Internet chart revealsthere is very little disparity between the male and female Internet users. This informationreflects a trend for the gender of the American Internet user is shifting from a largely male

percentage to a more equal gender usage percentage when comparing the data from iNetshop(1998-2005) to the World Bank Group (2007) data. The trend in the Internet market continuesto change as faster technology is made available to more users. Leslie Taylor (2006) reports,

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"broadband penetration grew 13 percent last year to 95.5 million homes, which means 68percent of active home Internet users now use a broadband connection, according to a studyreleased last week by Nielsen//NetRatings." Taylor's information also discloses, the Internet isbecoming a central medium in the daily lives of those who have internet access. Internet userhabits are changing as the speed of broadband has increased the average person's usage of thecomputer at home. Last year the average user used their computer 30.5 hours a monthcompared to 25.5 hours a month just two years prior. The increase in the number of hours ofInternet use corresponds with the American demographic (2007) report, home internet userswith broadband spent on average 33% more time on line that those using narrow bandconnections (pg. 2).

As broadband continues grow in the Internet marketplace, the trends will be for thegender differential to continue to equalize. The growth in broadband customers will lead tomore hours spent using the Internet which by extension should result in a growth in sales forthe Internet providers.

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Market AnalysisThe Yahoo! 10 K report (2007) states, Yahoo promotes their marketing services in a

highly competitive and rapidly changing global Internet market. Yahoo! considers developingworld-class marketing is their competitive advantage in the volatile market of cyberspacetechnology. The services are offered to advertisers and their customers in over 20 differentlanguages and countries. Recognizing the different marketing needs of each distinctive marketis a fundamental approach for Yahool's marketing strategies. Segmenting each distinctivemarket into an individual geographic group, Yahoo! can manage and measuring each segmentgeographically. This enables Yahoo! to target the segment with customized marketing servicesunique to the particular geographic market. Yahoo l's commitment to providing specializedmarketing services to a diverse global advertising populace is evidenced through their staffingthe international offices with indigenous personal. By utilizing the input of indigenous personal,Yahoo! represents good global corporate citizenship. Yahoo! can offer better customer service

by providing for the unique cultural idiosyncrasies of each geographic market segment.The Yahoo! brand is a highly recognized service on the Internet both in marketing and

search services. The marketing strategy to retain customer loyalty and to continue to buildbrand recognition is to provide top quality customized marketing services through threeprimary channels of communication: direct, online, and telemarketing. The direct sales team'sfocal point is selling Yahool's marketing services and solutions to large advertisers. Online salesare directed toward self-service programs which enable advertisers to tailor their websites tospecific target markets by attaching links to the websites which directs customers to

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advertisers' products. Telemarketing's focal point is providing marketing services to mediumand small advertisers.

Yahoo! recently combined the management ofYahool's marketing services with theirsearch services to better meet the demands of the customers. Combing the managementteams under one managerial umbrella facilitates collaboration between the two services.Collaborative communication will synthesize Yahool'sinternal strengths with new technologicaladvancements to adjoin value-added components to their services. The combining actionpromotes Yahoo !S compet it ive advantage strategy of cont inuing to prov ide customizedadvertising to attract, retain, and engage users while experiencing demographic changes in thegeographic market segments.

Yahool's fundamental marketing approach is the continuance of product developmentand properly managing each market segment to ensure the Internet user is experiencing thebest services Yahoo! can offer. Yahoo! ascertains their marketing sector is involved in each stepof product development, management to understand our services, and the best method toconvey the services to the advertisers and the Internet user. Yahoo!'s marketing programutilizes all forms of media to convey their products to the geographical audiences of existingand potential users. The media consists of: online, television, print, radio and outdooradvertising. The use of all forms of advertising is "to bring the right service to the right peopleat the right time" (pg. 12).

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The customized marketing strategy is consistent with the development under "Yahoo!Fusion Services" according to Joan Raymond (2001). The "Fusion Service" integrated anadditional service in 2001 called "Yahoo! ?Buzz Index." The Buzz Index "gives a snapshot ofwhat's hot and what's not" with daily updates on data drawn from the visited websites whichYahoo! informs the advertisers with the derived data (pg. 1). The advertisers are enabled tomake critical marketing amendments to adapt quickly to the changes taking place in theirparticular market share. By informing advertisers to the website visiting habits of theircustomers, Yahoo! continues to market their services to the Internet users (pg. 2). Yahoo!'sinformation pool is derived from another source Yahoo! has crafted into their marketingstrategy. Yahoo! requires their users to register for their search services. A user in theregistration process gives their "demographic DNA" away to the information data bank.Allowing, Yahoo! to aid the advertisers with additional data for their website designs (pg. 3).The data and service additions coincide with the customized marketing strategy centered onthe geographical target markets established by Yahoo!.

As Yahoo! strives to provide world-class marketing to the Internet user, Yahoo! has toadapt to the changes in demographic trends being experienced in the United States market.The marketing strategies which Yahoo! has in place at present will enable them to react quicklyto geographic target market shifts. At present, according to statistics by the Demographics ofthe Internet User (2007), North America has the highest Internet usage penetration bypopulation than any other global market. To provide for the customized service for the UnitedStates in particular, Yahoo! staffs sales offices in eleven major cities dispersed throughout the

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states (Yahoo! 10K 2007, pg. 12). Target marketing the United States as one of theirgeographical market segments, Yahoo! should experience an increase in the user population asbroadband technology reaches a larger high-speed Internet audience. Leslie Taylor (2006)states, monthly user time increases by 30% after the installation of broadband connections aremade available to users. Yahoo!'s customized geographic market segment approach will beable to handle the emerging market trends and integrate the pooled data for advertisers toimplement advertising tactics to increase market penetration.

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CPMCompetitive Profile Matrix

Yahoo Google MSN

Ratin Scor Ratin Scor Ratin ScorCritical Success Factors Weight g e g e g e

Strong Brand Recognition 0.15 4 0.60 4 0.60 4 0.60Talented Employee Base 0.10 3 0.30 4 0 0 4 0 3 0.30Culture ofInnovation/Accountability 0.10 2 0.20 4 0 0 4 0 4 0 0 4 0Advertising 0.15 3 0 0 4 5 4 0.60 3 0 0 4 5International Markets 0.20 4 0.80 2 0 0 4 0 3 0.60Powerful BusinessRelationships 0.05 3 0.15 3 0.15 4 0.20Customer Loyalty 0.15 4 0.60 4 0.60 3 0 0 4 5

Market Share 0.10 3 0.30 4 0 0 4 0 2 0.20

Total 1.00 3 0 4 0 3.55 3.2

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Yahoo!'s competitive profile matrix (CPM) weighs international markets, .20, as the mostimportant item on the list of critical success factors. Yahool's score on this factor is thehighest in comparison to their two chief competitors, Google and MSN, reflecting a distinctivecompetitive advantage in the Internet market. Strong brand recognition has a weight, .15,assigned which replicates a high level of importance on the CPM. Maintaining strong brandrecognition to retain market share is rated and scored highly in the industry by all threecompanies on the matrix. The customer loya Ity factor weight, .15, discloses Yahoo's ran kingand score as second to Google; yet remaining ahead of MSN. The advertising factor weight,.015, rates Yahoo! and MSN equal; yet behind Google, the industry leader for this factor.Talented employee base weight, .10, rates and scores equal to MSN; yet lags behind Google.Yahoo! lags behind considerably in comparison to Google and MSN on the culture andinnovation and accountability factor. The factor weight, .10, on Yahoo's CPM does not reflecta high level in ranking the critical success factors, but does release valuable information incomparison to their competitors on the CPM. Yahoo! rates and scores the lowest on thisfactor. Market share weight, .10, shows Yahoo! is second to Google; yet leads MSN. Weighingthe powerful business relationships factor the least, .05, Yahoo! ranks and scores evenly withGoogle; yet MSN holds the top score and rating on this factor.

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SWOT MATRIX :STRENGTHS:1) Yahoo! Inc. has beatenGoogle in the mobile market.2) Yahoo! Inc. has manymore auxiliary productscompared to the competition.3) Yahoo! Inc. has strongbrand recognition.4) Access is available to

WEAKN ESSES:1) Yahoo! is ranked 5th invisitors among video sites.YouTube which is owned byGoogle is ranked 1st2) Yahoo! image searchhas been declining 3% per year.3) Google search results

OPPORTUNITIES:1) Internet videoadvertising spending expectedto increase by 82% to $410mill ion by 2006.2) Yahoo! Inc has

anyone with internet access.5) Partnerships with

MLB, VISA andNFL.

SOSTRATEGIES:1) S3 01 : Revamp thecurrent video site andencourage advertising on thesite by using the strong brandstrength and recognition ofYahoo!.2) S5 02: Use Flickr as a

generate twice as muchrevenue as Yahoo!.

4) Advertisingrevenues arefalling due toGoogle and othercompetitors in themarket.

WO STRATEGIES:1) W1 01: Use internet videoadvertising boom to strengthenYahoo! video sites.

2) W1 02: Use Flickr as a t oolto developing a better videosite.3) W2 02: Increase Flickr'scapabilit ies in order to reversethe decline in mage search onYahoo!

purchased Flickr.3) Broadband

expansion.4) Yahoo! has a strongand talented employee base.5) Yahoo! Haspenetrated markets that arestil l untouched by competitors.

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new means of advertising forthe partnerships with VISA,MLB and NFL.3) S405: Use Yahoo!'scurrent expanded to market totarget advertisers in thesecountries.

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THREATS: STSTRATEGIES: WT STRATEGIES:1 ) Google commands 1) S3 S5H: Use Yahoo!'s 1 ) W4 T1: Increaseabout 50% of all online brand recognition and its advertising for Yahoo! searchsearches and Yahoo! has only partnerships with MLB, NFLand engines to increase users.24% according to VISA to promote searches onNeilson/NetRating. Yahoo!.2) Consumer attitudes 2) S3 T4: Use Yahoo! brandtowards online advertising may recognition to build a socialbecome more negative. website through Yahoo! Inc.3) Increasing strength ofcompetitors.4) Social websites such asMySpace and Facebook arenow breaking into the onlineadvertising market.5) Google is

surpassing Yahoo!in revenues.

After developing the SWOT matrix it seems to be in the company's best interest to pursue astrategy that focuses on increasing their advertising revenues. Vahoo!' s most predomina ntstrength is their brand recognition. In developing a strategy for Yahoo!, the company shoulduse their strong brand recognition to entice more advertisers for their site. They also mustconcentrate their efforts on upgrading and advancing their target advertising capabilities.

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QSPMWEIGHKEY FACTORS T Strategy 1 Strategy 2

OPPORTUNITIES: AS TAS AS TASInternet video advertising expected to increase by 82%. 0.2 4 0.8 3 0.6Yahoo! Inc has purchased Flickr 0.1 4 0.4 4 0.4Broadband expansion 0.2 4 0.8 4 0.8

THREATS:Google command about 50% of all online searches and Yahoo!has only 24% 0.2 n / a n / a n / a n / aConsumer attitudes towards online advertising may become morenegative 0.05 2 0.1 1 0.05Increasing strength of competitors 0.1 2 0.2 1 0.1Social websites are no breaking into the advertising market(MySpace) 0.05 2 0.1 1 0.05Google is surpassing Yahoo! in revenues 0.1 1 0.1 1 0.1

1STRENGTHS:Yahoo! Inc has beaten Google in the mobile market 0.05 2 0.1 1 0.05Yahoo! Inc has many auxiliary operations 0.1 4 0.4 4 0.4Strong brand recognition 0.1 4 0.4 4 0.4Access available to anyone with internet access 0.2 4 0.8 4 0.8Partnerships with MLB, NFL and VISA 0.5 4 2 4 2

WEAKNESSES:Ranked 5th in visitors among video sites. YouTube owned byGoogle is 1st 0.1 1 0.1 1 0.1Image search has been declining 3% per year 0.1 2 0.2 2 0.2Google search results generate twice as much revenue thanYahoo! 0.1 2 0.2 1 0.1Advertising revenues are falling due to competition 0.2 2 0.4 2 0.4

1 7.1 6.55Strategy 1: Google search results generate twice as much revenue per yearthan Yahoo!Strategy 2: Google Commands 50% of all online searches and Yahoo hasonly 24%Conclusion: Both strategies are desirable for the company. However, Strategy 1 is slightly higher indesirability at this time. Yahoo! Inc. should consider implementing a strategy that increases thedesirabil ity of their video site.

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Space MatrixConservative FS Aggressive

321

. Q -CA -2 -1 0 1 2 3 IS

1

23

Defensive CompetitveES

INTERNAL STRATEG IC POSITION EXTERNAL STRATEG IC POSITIONFINANCIAL STRENGTH ENVIRONMENTAL STABILITY

Market Capital Technological ChangesReturn on Equity Rates of InflationCurrent Ratio Demand variabilityGross Profit Margin Competitive pressureCOMPETITVE AD VANAT AGE IN DU ST RY S TR ENGT H

Market share Growth potentialCustomer loyalty Profit potentialWebsite quality Financial stabilityTechnological know how39

Ease of entry into the market

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F IN A NC IA L S TRENG TH

The market capital for Yahoo! is 37.25 billion, Google is 150.03 billion andthe industry is 296.7 million.The return on equity for Yahoo! is 8.5%, Google is 23.26% and the industryis 12.1%.The current ratio for Yahoo! is 2.54, Google is 10.The gross profit margin for Yahoo! is 3.75 billion and Google is 6.38 billion.

IN DUSTRY STRENG TH

There is unlimited growth potential in the industry due to the increasing useof the internet.There is an increase in the amount of advertiser spending on the internetwhich will create high profit potential.The industry is stable due to the increasing use ofthe internet.New internet companies are not as lucrative as Yahoo! and Google sotherefore the ease of entry into the market is relatively low.

ENVIRONEMENTAL S TA B IL IT YTechnological changes are occurring rapidly.Inflation will hinder prof it in overseas ventures.Demand is relat ively stable for advert ising on the internet.There is an increase in competit ive pressure between Yahoo!, Google,MSN and other well known companies.

COMPETE TIV E A DVANTAGE

The market share is increasing globally.Customer loyalty is very low.Websites are increasing in quality and ease for all users.

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RATING

2

1

339

5

5

5

20

-3-5-1-4

-13

-1-5-1

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Technological changes are increasing the demand for technological experts. -3-10

CONCLUSION

ESAverage is -13/4 = -3.25. ISAverage is 20/4 = 5.CAAverage is -10/4 = -2.5. FSAverage is 9/4 = 2.25Directional Vector Coordinates: X-axis: -2.5 + (+5) = 2.75

Y-axis: -3.25 + (+2.25) = -1Yahoo! should pursue conservative strategies.

The SPACEmatrix has shown that Yahoo! Inc., should pursue a strategy that is conservativerather than aggressive, defensive or competitive. This along with the SWOT matrix shows thatYahoo! should pursue a strategy that increases their advertising revenue by upgrading theirtarget advertising capabilities.

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Strategic IssuesAs demonstrated in the QSPM, CPM, and SWOT matrix, Yahoo has significant issues in

the category of search. As discussed in the previous sections of this report though, Yahoo seesitself as a portal company. A website who's primary motive is connecting the world with it'sinfo rmatio n.

This is a fantastic goal, but one that Yahoo needs to abandon. Yahoo's search producthas suffered considerably, because of expansion into other areas. They grew up a purveyor ofportals, but began to feel content in their search, forgetting that it was the reason peoplevisited their site. Instead, the company focused supreme effort in the realm of content. Yahootried to remain 'sticky,' so that users would have incentive to come back.

This precise area was long thought to be Google's weakness. The lack of a 'sign infeature' would permit users to go elsewhere. Instead, it has brought more people to the sitebecause Google is easy to use and not feature laden. The search feature is straightforward andsimple. In addition, Google has added the advertising network, marketing the ads as a furtherenabler.

There are four basic problems which are the source of Yahoo's falling revenue andreduced cash flow. Those issues are:

Google'sSearchresults generate twice asmuch revenue asYahoo's searchresults. Advertising rates are falling due to Google and other competitors Google commands about 50% of all online searches,and it is increasingevery quarter Increasingstrength of competitors in the portal market

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Google's search results generate twice as much revenue as Yahoo's results:

In 2006, Yahoo generated $6.4 billion in revenue. This total was up from $5.3 billion in

2005. Google, on the other hand, had revenues of $10.6 billion. In 2005, Google's figures camein at approximately $6.1 billion. The reason? Search.

Google has consistently honed its search algorithm to include the advertising network.This has led to very tight connections between keywords and ad placements. Advertisers paywhen their ads are displayed next to relevant content, and only when they are clicked by a user.

Furthermore, Google has opened up their advertising network to outside publishers;namely web masters with smaller sites, buy who still generate traffic. When an ad is click ontheir site, the webmaster shares in the profit.

Yahoo has begun development of a similar ad network which will take advantage of thelarge base of independent website owners. The problem is Yahoo will need to take thesepublishers away from Google's products. This 'beta' program has been in development for overa year, and it is rumored that Yahoo pays a higher share of those ad dollars than their rival. Thesystem is still flawed though, because advertisements which are displayed are not cohesivewith the content provided.

Therefore, Yahoo needs to invest time and money into perfecting the algorithm whichserves those ads. Until then, they will remain in second place.

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Advertising rates are falling due to Google and other competitors

At the time of this writing, Yahoo has hundreds of competitors in the ppe and web

advertising market, but none are as uniquely positioned except for Google. Each of these minorcompetitors have less identifiable brands and little to no traffic to capitalize on.

With the minor competition though, the average cost of a pay per click advertisementhas fallen. The keywords which are the anchor for the advertisement process are starting todecrease in price because of increased competition through the entire sector. Google and

Yahoo offer a premium service, so they charge more. Their competitors charge less so thatthey may capture customers, hence lowering the overall revenue of the larger companies.

With Google's prevalence and the minor competitors, Yahoo needs to clean up their adserving algorithm before they will recognize a shift in their revenues.

Google commands about 50% of all online searches, and it is increasing every quarter

In order for Yahoo to challenge the quickly growing Google, they need to refocus onwhat their users are there for - search. It isn't Yahoo Finance, Autos, or Groups; it is search.Plain and simple.

When that search is cluttered, irrelevant, or wrong, it drives users away.

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Increasing strength of competitors in the portal market

A portal is defined as "a starting point for Web activities." Yahoo has done a brilliant job

conveying this role to its users. They have spent millions of dollars to build out the site andacquire web commodities, all so their visitors will stay longer.

The major weakness of this strategy is that there are competitors doing better. Thesecompetitors are social networking sites. Social networks are the sites that allow users toconnect. They are wrought with user generated content, uploaded images, mailing capabilities,

etc. They allow users to connect. Yahoo's strategy of providing content which users siftthrough is being challenged.

In Summary

Yahoo is being challenged on four fronts, all tied closely to search. These include lowerrevenues in the advertising networks due to competitors, Google's dominance in the searchand advertising space, inefficient search results, and the changing face of portals.

The company needs to come to the realization that search is their future, withadvertising intertwined. Once their core competencies have shifted successfully from a portalstrategy to a company relying on its search algorithm, they can begin to implement theadvertising strategies that have proven useful in banner ad integration, for the contextualadvertising market.

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The first step is refining their search algorithm, though. Yahoo may even combine theirintense focus on portals to deliver more focused results in their queries. For instance, they canleverage the power of social networks and blogs, quantifying the links and keywords in a formatthat Google has yet to recognize. In short, Yahoo can be the dominant search engine byapplying a new age search algorithm to its rankings.

Coupled with this algorithm, they can deliver smarter text advertising. Yahoo is the onlysearch engine that not only quantifies the linking text, or anchor words which transport you toanother site, but also the surrounding keywords. For example, if a user is reading an articleabout spyware removal, and the link is placed in the word spyware, then Yahoo would be ableto distinguish that three words before 'spyware removal' was the brand name of a piece ofsoftware. Then, if a user clicked on the link, they would instantaneously be served an ad forthat spyware solution.

This new advertising structure will need to be expanded to meet the demands of theindependent webmasters in charge of various, niche sites. Payouts should be slightly higherbecause they are breaking into Google's area.

By Yahoo focusing on improving its search algorithm, they will be directly addressingtheir diminishing user base. People are leaving because the search results aren't as relevant as

Google's. So change the algorithm to account for more factors than Google's does.Advertisers are advertising with Yahoo because their implementation is faulty; their

search engine is flawed. Clean up the search results, and that problem will disappear.

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In the end, Yahoo needs to deliver a more value added product. Not in the form ofmore portal pages or more section to their website, but a more flawless search engine. Therest can be harnessed from that.

Strategy ImplementationYahoo will move forward with one core competency, which is search. They will focus

their resources on developing the algorithm necessary to key in on social networks and portalsbecause of their background in the history. They will design and implement a better solution.

Their ad network will be integrated into the search algorithm to pick up relatedkeywords in linking text and content. This will be coupled with webmaster utilization so thatoutside publishers may benefit from Yahoo's resources and advertising network. All in all, theoutside influence will increase Yahoo's revenue.

The strategic implementation will follow this path:

1. Redirect Employees2 . Refine the Algorithm3 . Implement the Algorithm4 . Refocus the Advertising Network5 . Expand the Ad Network6 . Implement Outside Publishers

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Redirect Employees

The strategic implementation will be such that no employees will be laid off. They will

simply be redirected. The core mission of Yahoo for over a decade has been to focus as aportal. They were told to expand the network, not make it better. Their new initiative will beto forget about expansion, and refine the search capabilities of the site. Hence, forming thefoundation of the new company strategy.

The first thing that needs to be done is alert everyone of the change. This will take place

in a top-down manner. First the upper level managers will be met with, then down from there.The first day, each of the 10,000 employees will need to be notified in one form or another.Depending on the shift patterns, or whether the managers believe it is necessary to alert themindividually, they will all be contacted. In charge of the project will also be two individuals, onetask oriented and one more inclined to deal with the emotional side.

The next step will be redirecting employees work habits. For those who will beswitching groups (going from the portal philosophy to the search initiative), they will be movedto different offices. Their desks, computers, etc. will be switched. They will have a new cubicleor office with the search team. Once there, it will be possible to start separating the individualsinto team so that the search strategy can be attacked. Some will work through code while

others will research.

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Refine the Algorithm

This team will then come together under the two project managers, or under their

supervision to some extent. They will apply the research and programming knowledge to planout and refine a new algorithm for Yahoo. This will entail the variables of a groups who havebeen tasked with research. They are the ones who will provide the ideas and thoughts on thesetup. The programmers will begin to put their thoughts into something a computer caninterpret, otherwise known as coding.

After the algorithm has been coded, it will be tested thoroughly. Those sameresearchers will be responsible for trying to break it. They will test for the validity of the pageranking techniques and make sure that everything is on par. If there are discrepancies, they willalert the managers and the programmers and come up with a solution as soon as possible.

In traditional coding projects, up to 90% of the time is put into the planning stage.Therefore, the emotionally oriented leader will be the one coaching this session. The taskoriented will issue objectives, but will playa sub-crucial role in the projects development. Hewill instead focus on the design aspects and how they relate to the coding. He will not bepushing the researchers to extraordinary limits.

After the search is sufficiently refined, it goes to the implementation phase.

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Implement the Algorithm

This phase is simply the rollout of the new search algorithm. The algorithm should be

soft launched without any real marketing behind it initially. In order to successfully work, themass of users need to test out the algorithm before it is marketed thoroughly.

This stage will call for 'all hands on deck' to combat issues taking place in the algorithmitself. Emergency coding may be necessary as well.

Once the launch has been successfully pulled off, it is necessary to market it efficiently.This can be done through online ads placed at high traffic sites, such as was done when Yahoogot their facelift six months ago.

Refocus the Advertising Network

With the successful product launch, it is now necessary to integrate the advertisingsoftware into the search engine. This can be done using the techniques used before the newalgorithm, but using better keyword data which the new search algorithm is providing.

The people who researched the algorithm will be tasked with promoting the newfeatures on the website. They will be the soft touch of the advertisement relaunch, and led bythe emotionally oriented leader. The task oriented manager will be at the helm of the

advertising network relaunch.

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Expand the Ad Network

The expansion of the ad network will include accepting new advertisers and publishers

into the advertisement process. Infrastructure needs will be handled by the programmers. Theresearchers will be encouraging new publishers to sign up and handling the emails, whileapproving the new publishers.

The Implementation of Outside Publishers

As the final step in the relaunch, the coders will continue to refine the advertisementalgorithms so that it ensures absolute targeting. The other employees will continue to handlethe soft side of the business; getting new publishers, providing for the existing ones, andhandling feedback.

The Summary

This search engine relaunch is a difficult and painstaking process, but it will refocus thebusiness in the most profitable way possible. Having a good base to establish a advertisingnetwork is the best way to go forward for growth. If the search algorithm is failing, then anadvertising network built on top of it will be leaking dollars.

This strategy will help Yahoo maintain the brand while allowing it to refocus the core of

its business.

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