When Marissa Mayer took over as CEO at Yahoo! Inc. (YHOO) in July, one of the first things she did was change the company’s mission statement. Previously a “premier digital media company,” Yahoo now aspires “to make the world’s daily habits inspiring and entertaining.” Parse through the PR speak and it becomes clear that the company wants to be a leader in the growing mobile market, as no other device is poised to inform the world’s daily habits more in the years ahead than the smartphone.
There are currently 1.5 billion mobile smartphone users worldwide, a number that increased 31 percent between 2011 and 2012, according to data from the venture capital firm Kleiner Perkins Caufield & Byers. Mobile Internet traffic has also steadily increased around 50 percent each year since 2009, with 15 percent of Internet traffic being mediated by smartphones. In the same report, KPCB general partner Mary Meeker predicted that the trend would continue into the foreseeable future, with the most dramatic growth coming from emerging markets like India and China. To her, a mobile revolution powered by applications and advertising represents a new economic frontier. For Yahoo, a company that squandered its claim to the Internet throne at the turn of the century, it is an opportunity to start again.
Robby Stein was hired by Mayer while she was a vice president at Google Inc (GOOG). Now the head of Yahoo’s mobile initiative, based in New York away from the company’s headquarters in Sunnyvalve, Calif., Stein discussed Mayer’s vision for Yahoo in a recent phone interview. “Building a great product company is a chain reaction,” he explained, “Great people build great products which attract users that attract advertisers.” To catalyze this process, Mayer has borrowed from her Google background (literally, in the case of Stein) by building a corporate culture that treats its employees well enough that they work longer than they otherwise would. The company now offers free on-site food and Apple products, and has curtailed its remote working policy to encourage more fusion among employees. “Companies with the best talent win, and it’s clear we’re back in the game,” declared Mayer in the company’s first quarter earnings call.
On the product side, Yahoo has streamlined its mobile offerings by eliminating underperforming services and making the remaining ones sleeker. The company has notably overhauled Yahoo Mail, its email service, and Flickr, its photo-hosting platform, to both be more mobile-centered. But Yahoo has received the most attention for the services it has purchased. Since Mayer took over, Yahoo has acquired 13 companies, nearly all of which have been mobile-first. Undoubtedly the biggest splash was the company’s acquisition of Tumblr Inc., a blogging platform popular especially popular with teenagers and young adults.
To many, the move was reminiscent of Facebook Inc.’s (FB) purchase of Instagram Inc. Both of the acquired companies fetched nine figures without demonstrating that they could be financially solvent on their own. But where Instagram was a proven commodity in the mobile market, having been originally designed for editing pictures taken on phones, analysts disagree about the degree to which Tumblr will enhance Yahoo’s mobile presence.
According to a report by Morningstar Inc. senior stock analyst Rick Summer, in reference to the Tumblr deal, “Yahoo has essentially paid a high price for incremental page views without filling in gaps in the business.” Others met the move with more enthusiasm. Nikhil Sethi, the founder of Adaptly Inc., a company that buys ad space on social networks for clients like Pepsi and Kraft, considers Tumblr “very exciting from a brand advertising point of view, mostly to entertainment and fashion clients,” before adding that “things are definitely changing under Mayer.” Bank of America Corp. equities analyst Joyce Tran voiced a similar sentiment, saying Yahoo has “become a little more hip,” thanks to its recent string of acquisitions.
Still, “hip” is hard to quantify, and by the most recent quantifiable measures, Yahoo is struggling for room alongside the Internet product companies currently dominating the mobile space. In 2012, half of which was under Mayer, Yahoo reported revenue of $4.47 billion, up two percent from 2011, and net income of $3.95 billion, up 35 percent from the previous year. Nonetheless, the $4.47 billion figure was dwarfed by the $50.2 billion that Google reported during the same time period.
The gap between Yahoo and Google is reflected in the mobile market as well. In a February 15th article, All Things D writer Kara Swisher cited her own sources at Yahoo and their claims that the company’s mobile revenues for 2012 were $125 million. A week later Forbes speculated that Google’s mobile revenues for the 2012 year were $5.2 billion. If both estimates are to be believed, Google’s mobile operation currently generates over 40 times more revenue than Yahoo’s.
Then there is the matter of users. Yahoo highlighted in its first quarter conference call that 300 million people were using at least one of its mobile services, up 50 percent from the end of the previous year. But what is perceived as progress still puts Yahoo’s user base at less than half of Facebook’s, whose mobile audience is 680 million, according to the company’s 2012 year-end report.
Already playing from behind, there are reasons why Yahoo might slip further as smartphones become more popular. Although Sethi praised Yahoo’s recent incorporation of in-stream ads, a form of native advertising, on some of its mobile services, it appears the company has been slow to adapt to real-time bidding. RTB is a mechanism by which display ads are sold individually, in real-time and within a fraction of a second, to online advertising buyers. Currently a $2.97 billion market, the financial services firm William Blair forecasts RTB to be a $13.88 billion one by 2016, with much of the market being mobile.
For a company that relies on advertising for 40 percent of its revenue, as Yahoo does, it is paramount that the proper infrastructure is in place to meet the new mobile market demands. This is a source of concern for Ralph Schackart, an analyst who covers Yahoo for William Blair. In his review of the company’s 2013 first quarter, he maintained the firm’s Market Perform rating, largely because “it is not entirely clear how Yahoo is positioned to a market movement to RTB/programmatic buying.”
There is also the question of how successful Yahoo’s arsenal of applications can be without its own operating system. “I bought an Android device because Google gets the user experience, and I wanted the easiest access to its services,” explained Jordan Fudge, a Northwestern junior who spent last summer working for Sony Corporation (SNE). With 70 percent of smartphones now running Android, Google is projected to own more than half of the $7.29 billion mobile advertising market in 2013, according to eMarketer, leaving companies like Yahoo to fight for what remains.
In spite of these challenges, those involved with crafting Yahoo’s mobile strategy believe it represents a new chapter in the company’s history. “We want to be building applications that are touching 1 billion people,” declared Stein, who graduated from Medill in 2007, “how we go about doing that can take a lot of different forms, but that’s going to be how I define success.” His success, of course, is contingent on a chain reaction; getting mobile users, and then advertisers, and then investors, to agree.