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Yahoo! vs. Google

Why Yahoo! can rise in the areas that hurt Google most


Yahoo!’s figures show that revenues are growing as it tightens its focus on the mobile space. Meanwhile, Google is battling falling profit margins in the same mobile hotspot: advertising. Stuart Lauchlan hears from Yahoo! CEO Marissa Mayer on why Google’s mounting problems spell opportunity for the underdog.

This is the latest in our The Decoder series, in which the Strategist unpacks strategic lessons from recent CEO announcements.

TECHNOLOGY SHORTThis is a tale of two digital giants: one trying to rebuild the glory days of its youth, and the other struggling to ensure that it hangs onto its market dominance in a changing world. Both are eyeing the ‘mobile first’ revolution from different strategic perspectives.

The first company is Yahoo!, the early dotcom champion that lost its way and is now seeking to tap into mobile-first opportunities to restore its fortunes. The second is Google, the search colossus and cloud platform that finds itself casting nervous glances at the same space, where its bottom line is hurting as margins are compressed.

The Yahoo! perspective

For Yahoo!, there’s a lot riding on the strategic vision of CEO Marissa Mayer, who came onboard in July 2012 as the company’s sixth CEO in less than five years, charged with restoring its relevance and tarnished credibility.

Marissa Mayer

Yahoo! CEO Marissa Mayer

On her arrival, Mayer – who is in the vanguard of a new wave of women tech CEOs that includes IBM’s Virginia Rometty and HP’s Meg Whitman – emphasised the scale of the turnaround effort necessary to get Yahoo! back on track. She described it as a multiyear journey that would deliver “modest” revenue growth in the second half of 2014, at the earliest.

In fact, Yahoo!’s Q1 numbers, announced in April 2014, saw first-quarter sales, excluding revenue passed onto partner sites, of $1.09 billion, up from $1.07 billion in the same quarter last year. But countering this was a 20 per cent year-on-year drop in quarterly profits, to $311.6 million from $390.3 million in 2013.

Mayer never said that her task would be easy. Her turnaround strategy is built on four pillars: social media, video, native advertising and mobile. She admits that these are “still small relative to Yahoo!’s broader business, but they are seeing accelerating growth as we continue to invest in them”.

Of these four targeted-growth market sectors, Mayer has given mobile the tightest focus – in particular, mobile advertising, the area where Google is hurting most. “We know that there is going to be a huge shift of dollars into the digital medium as PC and mobile continue to increase overall in use,” she says. “We have been pioneering innovative ways to approach mobile advertising.”

On top of this comes mobile search, another area where Yahoo! can make inroads on fortress Google. “Our growth in mobile search is an important part of our long-term strategy,” she continues. “This quarter, we saw nearly 100 per cent growth across almost every measure of our mobile search business. In terms of contextual and mobile search, we think that there is a huge opportunity moving forward to innovate.

“Mobile is such an exciting new platform and what users are really looking for when they search is at this time undefined. Sometimes they’re looking more for ‘local’, sometimes it needs to be more personal. What types of information they really like to see in that search are not yet well understood or defined.”

Apple for the picking?

If Silicon Valley rumours are to be believed, Mayer is wooing Apple to make Yahoo! the default search engine for iPhones and iPads, in place of Google. Apple currently receives an estimated S1 billion a year from Google for the traffic that Apple drives to Google’s servers and ad networks, so it would be a high-priced gambit.

But Yahoo! may be able to afford it. It has a cash bonus coming its way later this year when Chinese ecommerce giant Alibaba floats in the US, potentially valuing Alibaba at more than $100 billion. Yahoo! has a 24 per cent stake in the company and has to sell 40 per cent of that on IPO.

There’s been a good deal of speculation on Wall Street about what Yahoo! will do with the cash; pushing some of it Apple’s way may be one answer. But Google is unlikely to let the Apple relationship go without a fight, particularly as its own mobile strategy carries with it more pain points than Yahoo!’s.

The Google stats

At first sight, Google is well placed in the multiplatform world. It dominates desktop search with a 65 per cent market share, and mobile search with a 90 per cent share. But Google should beware of sitting too comfortably on its laurels. It has done little to ingratiate itself with regulators and content providers in recent years, given its stranglehold over multiple industries’ IP and publishing models. People feel obliged to work with Google, but resentment at being forced to bend to its will is rife.

Google Glass

Has the all-seeing Google taken its eye off the importance of mobile ad revenues?

In its latest financial results, published April 2014, Google announced that its ‘cost per click’ revenues had declined by nine per cent, as more and more users access the web from their smartphones and mobile devices first.

If the shift towards mobile content consumption and advertising continues – as is inevitable – then Google will continue to see its mainstay desktop revenues decline. That will hurt, as digital agencies force down the prices that they’re willing to pay for mobile advertising, which is seen as a lower-value medium that many users find intrusive.

Google’s belief is that the mobile advertising market is still too immature to make broad predictions about lower revenues per click in the long term. “Right now, we can lead the horse to the water, but we can’t make it drink,” says Nikesh Arora, Google’s chief business officer. “[The] journey is just beginning for advertisers on mobile sites. They’re just beginning to understand what it takes for the end user to come and transact on their websites.”

For Google, the problem is rooted in its historic success on the desktop. Millions of companies worldwide have poured money into researching and stabilising their desktop presences, but far fewer have given the same focus and depth to their mobile estate. As a result, Google is dependent on seeing advertisers improve their own online offerings in the mobile space.

“Try buying something on many companies’ mobile websites and it’s more ‘at own risk’ than [using] their desktop sites,” says Arora. “They’ve been spending a decade trying to optimise their desktop sites, but they haven’t spent enough time optimising the mobile experience.

“In some cases, [they're] not believing that people want to transact with them on a mobile device, and in other cases they’re just slow: they are slowly diverting resources from desktop to mobile.”

The challenge for Google, therefore, is keeping Wall Street onside while it makes what will be a long, slow transition from its existing desktop revenue base to a hybrid desktop/mobile one. That transition may not be easy, given the elevated expectations – and, from some quarters, simmering resentment – that accompany its every announcement.

For example, Google turned in Q1 2014 profits of $3.65 billion on $15.4 billion in revenues: a year-on-year profit increase of three per cent on a 19 per cent uptick in revenues. Despite this, Wall Street sent Google’s share price tumbling by six per cent as performance was beneath expectations and the underlying trend in mobile is troubling analysts.

In that sense, Yahoo! is better positioned, if only because the combined weight of hype and expectation does not sit so heavily on its shoulders. The right moves at the right times could carry the market with it.

After all, it is easy to assume that many of the great IT battles have already been fought, and that Google has won them. But this is to ignore the many previous such assumptions that tech industry analysts have made over the years: that Apple had become irrelevant in the wake of Windows’ dominance of the desktop, for example, and that Microsoft had the world at its feet. All of those assumptions now look foolish.

Don’t hand all the prizes to Google just yet. TS

The Strategist says

Google’s many exciting innovations have made the world dance to its tune, but resentment about its growing power and influence should not be underestimated. Many publishers and content providers of every size and type might relish the opportunity to escape from Google’s grasp. And despite moving into new areas, such as wearables and robotics, Google is highly dependant on advertising revenues: a tough challenge as companies make the slow transition to a mobile-first policy. With cash in the bank and little in the way of expectations, Yahoo! retains the capacity to surprise. Don’t write off the underdog just yet.
Stuart Lauchlan is co-founding editor of Diginomica, a Strategist magazine media partner. Additional reporting and analysis Chris Middleton.



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