Tale of Two Cities in Internet Search

As Yahoo (YHOO) prepares another quarter analysts are looking ever more skeptical about the company's turnaround plans. Job cuts and salary cuts are being covered with increased scrutiny around Yahoo by major media outlets signaling the planning stages are well in the works. As the once proud Internet giant continues falling not so gracefully to its current second fiddle role in Internet Search and Advertising, Google's (GOOG) juggernaut keeps growing.

Yahoo has always had success in branded display advertising, which typically is the focus of big, established corporations and in times of economic slow-downs it is those businesses that are likely to soften their budgets. Yahoo's Finance pages have been decimated as trading houses and banks continue to shutter their doors or merge with each other for survival. Google's strength lies in its search advertising which is available not only to the giant corporations, but millions of small enterprises and basement shops around the world. Got a website? Want advertising? Bid on a few keywords and drive traffic, and that's not even mentioning the massive breadth of "Ads by Gooooooooogle", or AdSense in corporate speak.

Yahoo's next generation Panama Ad system hasn't been to glowing success yet that the company had hoped for and as the stock tumbles into the $12 range, how grand does the $31/share offer from Microsoft (MSFT) earlier this year look now?

Granted Yahoo generated almost $7Billion in Revenue in 2007 and had net profits of over $600Million but it still has not found effective ways to turn its huge user base into a profit generating machine. While the rumors of lay-offs, cuts and salary readjustments are making the rounds within the Yahoo mills, it's toughest competitor just finished blowing the doors off of another highly profitable quarter. Google reported earnings (excluding items) of $4.92/share, beating estimates that had earnings pegged in the $4.70s ranges. Income for the period for Google was $1.35Billion ($4.24/share with special items) and executives at the company made certain to claim, several times, during the conference call that those millions of seemingly little ad clicks are considered as "recession-proof" as advertising can be because of the sophisticated performance and accountability metrics that are available as part of Google's AdWords toolbox.

It seems that as Yahoo continues to harp on the economy as the cause of its slowdowns, mostly in the bread and butter display area, the bigger brother at Google finds ways to be more efficient and more effective. Something has to change within the culture and structure of Yahoo to stop the bleeding. Maybe wholesale cuts are the beginning or maybe they are desperate measures in trying times, but if anything is certain Yahoo needs to put focus back on its user base, and it has to draw up interest within that base to use or try out all the tools in the company's arsenal.

Bottom line: The company is not doing an effective job in convincing its huge pool of Mail and Messenger users to search at Yahoo or to use Yahoo Calendars and other services. Luckily for Yahoo, it is not alone in this problem as Microsoft is unable to drum up any significant interest in its Live Search platform either, standing in a distant 3rd place in search queries.

The heralded premium web portal that once was Yahoo needs to show some Internet savvy at a time when individuals all over the country are zipping up their pockets. While analysts estimate earnings of $0.09/share this quarter and $0.53/share for the full year, and the same $0.53/share for next year, Yahoo's growth story is all but over in the eyes of Wall Street. But it doesn't have to be if Yahoo puts its users first and plans for tighter user experience and integration over the next couple of years.

Yang and company need something to pitch to Investors of Yahoo, and growth plans revealed months earlier that are surely for naught now with the latest economic troubles will not stop the bleeding. To convince the traders these days, the company will need a real surprise in results in addition to job cuts across most if not all its divisions. Get back to a core user focus and have a 2 year strategy ready to restore the luster of the once crowned King of the Internet. As a once proud Yahoo shareholder, if only for nostalgia sake, this company needs a turnaround story the Internet public can get behind.

Disclosure: Author owns GOOG, holds no position in YHOO, MSFT

Stocks rise Thursday, Carl Icahn takes on Yahoo board

Technology and Energy sectors made the biggest gains leading the Nasdaq (up 1.5%) and the S&P (up 1%) Thursday as the May Options expiration window winds to a close. Oil prices, still the brightest mark for the Energy sector stayed around $124, although they were unable to reach new peaks much past $126 a barrel.

It's an Oil price era in Stock and Futures trading right now and the commodity folks have been rejoicing the last couple of months virtually non-stop. Concerns over high oil resonate through many facets of the economy, with the biggest being the story of inflation. As high oil funnels itself through each and every sectors of the consumer business the increasing cost of manufacturing, transport and services will all have to be pushed onto the consumer, thus sparking increased inflation. Definitely an issue the Fed doesn't want to have to dive right into after seemingly only months ago steering the US away from a full blown recession by dramatically cutting Interest Rates.

In other news, technology related, Carl Icahn (shareholder activist/corporate wheeler-dealer) took a large stake in Yahoo (YHOO) and is prepared to enter into a proxy battle with current management. It is clear, several large shareholders were unhappy with the way the whole Yahoo-Microsoft (MSFT) situation went that the pressure was applied in order to unseat the current board at Yahoo, which for one will be more open to a buyout. The $33/share offer from Microsoft was substantial, and on the brink of completely overpaying, for the struggling Yahoo Internet outfit. On the one hand, the Internet is the future and Internet advertising is leading that future, but on the other, Yahoo is a struggling horse in the advertising game and can't seem to find any ways of putting together its huge customer base into meaningful and exciting new services. Carl Icahn thinks he can help though, and his track record for displacing management rings throughout Wall Street (see Motorola (MOT) for an example). Icahn is going to nominate his board members that will be more open to deal and hopefully get shareholders a fair price above $30/share. With Yahoo currently trading under $28 there's a potential there for an easy profitable trade, if Icahn is able to do as he wants.

Getting Microsoft back to the table will not be easy, as Microsoft's own shareholders jumped ship sending the stock to drift lower as the weeks to the potential alliance dragged on and on, so it is clear the deal isn't the most favourable from within the Software Giant's rank and file. Microsoft however, is desperate for an Internet presence and it can't seem to find the functionality and scale of web software and web services on its own. Windows Live is frankly unheard of in tech and user circles, Office Live, hasn't made any sort of dent and the Advertising division is losing money hand over fist as Google (GOOG) dominants Internet Search. Microsoft's biggest fear in this space has to be Google Apps (Google's free word processing, spreadsheet and presentation tools hosted on the web), and as such they have got to think that Yahoo's Internet service experience and scale will allow them to have viable online software tools when the game really changes.

Icahn will definitely use these points to re-open dialogue, and this along with Yahoo's profitable advertising initiatives should get Steve Ballmer talking again, which might at the end of the day reward those patient Yahoo shareholders.

Disclosure: Author owns GOOG, does not own MSFT, YHOO

Technology News & Market Notes: May 6th

Techno-Superhero Iron Man delivered almost $100Million at the domestic box office for Marvel (MVL) over the weekend and brought with it a shift in Market News as Technology Stocks have been the focus. Trading started the day lower but drifted towards the green as the day went on, eventually keeping the Dow, Nasdaq & S&P all with gains on the day.

Although Microsoft (MSFT) over the weekend withdrew its bid for Yahoo (YHOO), over a pricing issue, the sentiment across the street is that this deal has may have legs. Microsoft offered to raise its bid to $33/share while Yahoo remained firm at $37. Yahoo shareholders felt the brunt of the pain as Monday the stock lost 15%. A 6% rebound Tuesday, is largely attributed to Yahoo executives reiterating to the press they are still willing to negotiate. Microsoft has a couple choices, and even though they refused to go into a proxy fight to overthrow Yahoo's board of directors once, Traders seem to think a 2nd go-round is likely.

The dance with these two historic tech names will likely continue in the coming weeks and for what its worth, how badly Microsoft needs an effective brand presence in the growing Internet economy makes it pretty certain that the company will continue to pursue Yahoo, hoping this initial backing-away will build shareholder angst at Yahoo and force more favourable negotiations.

Apple (AAPL) made more headlines and extended its recent stock run as it announced partnerships with a couple carriers to expand iPhone distribution. Both deals revolve around the "sometime later this year" time-frame, so the thinking is that the European partners are waiting for the ever-so-coveted 3G iPhone to make its debut at the WorldWide Developer Conference in early June. Apple made deals with Vodafone to distribute the iPhone in 10 counties including India, Australia and Italy. Apple changed its business model for iPhone distribution in Italy by also partnering with Telecom Italia in that region. Other countries on the iPhone slate include Czech Republic, Egypt, Greece, Portugal, New Zealand, South Africa, Turkey and Canada (based on recent announcements by Rogers Communications (RCI.B)).

Disclosure: Author owns AAPL

Microsoft shows $44Billion, eyes Yahoo, to take on Google

On the morning of a rare Google (GOOG) earnings miss, the world's largest software company, Microsoft (MSFT), is taking full advantage of the negativity and swinging its own news story. The Seattle company disclosed to the public that it has offered $31/share ($44Billion) to purchase Yahoo! (YHOO). This combined Microsoft Internet division would be a stronger second place competitor to Google's search and advertising dominance.

Google reportedly owns about 60% of search share and almost 70% of search advertising dollars, with competitors, mainly Yahoo and Microsoft, claiming the remaining scraps. Mind you those scraps, can amount to plenty in a business sector expected to expand from $40Billion to $80Billion in value in the coming years. The scope, breadth and quality of advertising is increasing on the Internet as its ease of use, ease of tracking, and ROI effectiveness become clearler to companies all over the world. While still a small piece of the overall advertising pie, the Internet provides the most complete customer profile available for any form of advertising.

Now this is a point of contention, the whole privacy issue, but the fact remains that most things on the Internet can be tracked, and the more advertisers and advertising platforms know about their users, the more effective the ads can be. Google knows this very well, hence their dominant position! Microsoft and Yahoo know this as well but they've failed to make any strides on their own. Perhaps the combined division can put a dent in Google's cash-hording fortress. (At last check Google as a business is still extremely young and has almost $20Billion in the bank)

Let's hope the deal goes through, for Yahoo investors sake anyway. The stock has been beaten up of late falling to its lowest level in several years at $18 and change per share. Microsoft's offer represents an over 60% premium from Yahoo's closing price yesterday. But before we tout this as the resurrgence of Microsoft's Internet division (A business line that is still bleeding losses year after year), lets expand on thier strategy and ambitions here.

First, its clear Microsoft wants to be in the Internet Advertising space, and be successful at it. It's the future of advertising and its extremely lucrative and high margin. Secondly, Yahoo's the only big player with a decent following and even a shot at dethroning Google. It makes sense right, to just combine 2nd and 3rd place, and eventually maybe they'll cause a stir. Unfortunately the gold medalist here right now is the behemoth known as Google. And unless Google's been mysteriously taking Human Growth Hormone they wont topple themselves off the podium anytime soon.

There's plenty of problems I see with this deal, and not even first on my list is the sheer smell of desperation on Microsoft's part to completely over pay to get this deal done. Yes it's true, they tried to talk to Yahoo a year ago and were told to go home. So they came back, with thicker pockets and the attitude of "No, is unacceptable". Granted this deal would still have to pass through all sorts of regulatory hurdles but that shouldn't cause too much of a delay. The biggest problem is SYNERGY. I would imagine lots of Yahooligans are going to be out of work, unfortunately. Do you think corporate cultures easily come together. Not a chance. It takes long, hard work to make even the simpliest teams fit together, let alone putting a company like Yahoo, with over 11,000 employees, inside of Microsoft.

Interestingly enough, it wasn't too long ago that Microsoft head Steve Balmer was talking up a storm on how Microsoft's strategy will be to make smaller niche acquitions and develope integrated web services and all that jazz. Now it seems this is a complete shift in the opposite direction. The thing you know about Microsoft though, is that when they smell blood, and trust me, Yahoo is bleeding mercilessly, they go for the kill. In the end Yahoo shareholders must be smiling because they have just been bailed out of a 50% decline in their company stock.

Now there's been big time deals that have completely blown up when firms weren't in the same industry. AOL-Time Warner come to mind perhaps? But even within the same industry, it doesn't always work. Diamler-Chrysler? Can you say disaster? Now I'm optimistic that if Yahoo accepts, and it most likely will, there will be better times ahead for both companies in the Internet space. Micrsoft's platform for advertising has failed to excite anyone, and Yahoo's Panama Ad Center was seen to be its saviour once. Perhaps together they can work out the kinks and actually leverage all those millions of unused hotmail and yahoo mail accounts. Yahoo still is a giant Internet portal with lots of user traffic, and with that comes great potential. The key is Clear Focus and Strategy and perhaps that's something that Microsoft can bring to the table for a scrambling Yahoo and its convulated Internet vision. How long this will take to integrate and fulfill? Not even the experts know that, but trust me, it will not be soon.

On the upside, we know Microsoft is loaded and extremely patient when it comes to new initiatives. They can lose money for years to try and make a footprint. Let's just hope for Microsoft shareholders, that this isn't looked back on in history as a major stumble in its quest for the Internet. Microsoft's Ad platform has a long way to go but perhaps with Yahoo's profitable help they can get on track and mount a serious offensive on the next phase of the Internet business.

Disclosure: Author is long GOOG

Major Tech Earnings Start Q3 with a bang Part 2: Yahoo Shines

Another bell weather in its Technology Sector, Yahoo (YHOO) had modest expectations after quarters of struggles and declining growth. Today's earnings were a pleasant surprise as Yahoo topped expectations, signalling that it in fact may be turning the corner with its Ad platform and new acquisitions strategy.

Income fell slightly at $151Million, $0.11/share, same as a year ago, but revenue on the other hand for its own web businesses came in above expectations at $1.28Billion. Analysts had expected $1.24Billion on the top line number and $0.08/share in profit. Yahoo's guidance for the 4th quarter was within the range expected by analysts and that led to relief, leading shares up in after hours trading.

Although Yahoo is losing search share to Google (GOOG) it is not going down without a fight, in fact Yahoo is actively securing exclusive Internet Ad deals, and highlighted a few new ones at the end of the quarter. The company will now produce ads for WedMD, Forbes.com and Cars.com. A slight coup if you will as WebMD was previously using Google's Ad network. These are the kinds of aggressive moves that will bring Yahoo back into the limelight, as Yahoo notoriously lost out in several high profile bidding wars recently.

New CEO Jerry Yang made it his mandate to do a full review of all business units and he is thus far sticking to his word of trying to turn Yahoo around. This quarter is a start, however Google is still miles ahead of everyone in search. If Jerry and the Yahooligans keep securing more exclusive Ad space and build out their network the fruits of that labor will be seen in quarters and years to come. Yahoo however has to refocus on its core priorities and manage its huge user network. The most visited site on the Internet has to have a clearer plan on how it bring all of its services to all of its users in a cleaner and more efficient manner. This is priority number 1 in order for the company to return to its previously held dominant Web position.

Yahoo's successful quarter signals that Advertising remained healthy even during the credit crisis and housing downturn which is a very good sign for the Major player in the sector Google. In fact Google gained $12 after-hours on Yahoo's news as Investors anticipated even better numbers from the leader in Search Advertising Thursday.

This quarter was a definite sign of relief for Yahoo longs, and as the holiday season approaches its all smiles for the company. If Jerry can continue to tighten operations and secure further Ad deals he'll have a high flier on his hands in the year or 2 to come, but the engineers at Yahoo need to continue to innovate and not let the likes of Google and Facebook keep stealing users away. The results here are promising but Yahoo's valuations are still much higher than Google's on a forward basis and only continuing accelerations in profit growth will keep the company on this perch.

Disclosure: Author is long GOOG

Yahoo's New Search Tool shows how far ahead Google is

Google (GOOG), the dominant player in search and search advertising, is seeing its competitors constantly nipping at its heels and it seemingly ignores them and continues to innovate. While Yahoo (YHOO), Microsoft (MSFT), and Interactive's Ask (IACI) are trying to revamp, recreate and reinvigorate the search experience in the hopes of gaining market share and hence more advertisers, Google is padding its lead and running away with first rate technology innovations.

Ask.com has some neat complete search functions and combines results of all types of media and even includes little previews, but it is still a minor player in the search game. Microsoft's failed MSN unit is still around and kicking and losing ever more money, while the revamped Live platform has yet to gain any traction and Microsoft is continually seeing search share losses. Microsoft even tried to lure searchers by offering them points in exchange for prizes when they did searches and even included games inside MSN Messenger that forced users to search for answers to questions. Sorry Softie, but that's not gonna win over the advertisers and not gonna get people to give up on Google altogether.

Yahoo's newest feature, billed as a Search "Innovation", while positive for the languishing company, signals just how far behind the company is on the technology spectrum. Yahoo was once the poster child for the future of the Internet and these days it seemingly can't catch a break as revenue growth is slowing, share prices are slipping and it loses portions of market share to Google every quarter. The new feature for Yahoo is "Search-Assist", which is a Search Suggestion/Completion tool that slides out when users type in a search keyword. As a user starts typing into the search box a list of common or relevant search terms comes up. Pretty cool huh! It is beneficial but looking behind the scenes I think tells a different story. Let's step back and see just what this says about Yahoo's tactics.

I think it showcases a desperation on Yahoo's part that it simply doesn't have the back end grunt to truly become a personalized search power house. A Power House that Google is slowing but surely building as it releases tools such as Web History, iGoogle and Personalized Search. All those quarters of increasing Capital Expenditures that analysts were frightened about are proving well worth their weight in gold as Google is able to completely change the search game again and again while its competitors struggle to keep up. Yahoo's search box suggestions come off as simply common or popular search terms, while all well and good, that's actually a step sideways and not forwards in the technological sense.

As the Internet expands and the plethora of information becomes exceedingly complex only YOU can determine exactly what YOU'RE looking for, not everybody else. Google's got you covered. A recent post on Google's official blog states (Link) that Yes its concerned about the huge privacy issues and its doing all it can but it also is working tremendously to tailor the Internet to each user.

"search algorithms that are designed to take your personal preferences into account, including the things you search for and the sites you visit, have better odds of delivering useful results for you. So if you’ve been checking out sites about the Louvre and you search for 'Paris', you’re more likely to get results about the French capital than the celebrity heiress" Additionally Google goes on to showcase that a search for Football in Chicago is completely different than a search for Football in London, England.

Google is taking localized and personalized search into realms that its competitors can only dream of getting to. This is all due to that massive technology spending to build out an infrastructure of computing that can handle incredible complexity when it comes to something that should be as simple as search. That is why Google gets a majority of search traffic, has higher click-through rates for its tailored advertisements, continues to grow rapidly and demands a market premium via a lofty valuation.

Yahoo, Microsoft and Ask right now are simply out of their league when it comes to search innovations. Google has the brains, with its thousands of dedicated creative employees, it has the brawn, with its incredible breadth of technology infrastructure, and it has bank roll to keep innovating in ever expanding new areas of not only Search Technology but all aspects of our daily Internet lives.

Disclosure: Author is long GOOG

Earnings Week: July 16-20

Earnings season has gotten underway in full swing in the American markets.

Weekly earnings that are of note:

July 17th
Intel (INTC) : Expected $0.19/share
Merrill Lynch (MER): Expected $2.02/share
Coca-Cola (KO): Expected $0.82/share
Yahoo (YHOO): Expected $0.11/share

July 18th
Altria (MO): Expected $1.13/share
eBay (EBAY): Expected $0.32/share
JP Morgan Chase (JPM): Expected $1.08/share
Pfizer (PFE): Expected $0.50/share

July 19th
Banc Of America (BAC): Expected $1.20/share
Broadcom (BRCM): Expected $0.27/share
Google (GOOG): Expected $ 3.59/share
Microsoft (MSFT): Expected $0.31/share

July 20th
Citigroup (C): Expected $1.13/share
Wachovia (WB): Expected $1.22/share

complete earnings schedule available at Yahoo Finance
http://biz.yahoo.com/research/earncal/20070716.html

It'll be a big week for financials and banking as investors will get to see how munch of an effect the sub-prime meltdown spillover has continued to have. Also a big week for technology, specifically in the Internet space as Google will once again be in a position to overshadow Yahoo and Microsoft in the search earnings space.

Innovators within Technology

It's really Apple (AAPL) and Google (GOOG) that are the two driving forces of innovation within the Internet/Computer part of the technology sector. When Google's CEO became an Apple board member there was some signs that the companies would work together on many more projects. We're seeing this now with Google Maps integration into the iPhone, YouTube on AppleTV and the iPhone and Google's search being prominent in Safari and Leopard.

Yahoo (YHOO) also is involved with Apple providing push e-mail to the iPhone, the Stock app and a host of other innovative services, however, it's a company very much in limbo, having just ousted long time CEO Terry Semel. Any reaps from their long-awaited ad platform Project Panama have yet to show major dividends and it seems like Yahoo has a long way to go to steer the ship in the right direction.

Microsoft (MSFT) on the other hand seems stuck in the mud, is a company that has far too many silos for its own good and cannot innovate as quickly as the others. While companies like Apple, Google, and Research In Motion (RIMM) are busy combining all of their products and services over a common platform, Microsoft is missing the party by having completely separate divisions trying to integrate separate products into a common themes. However thus far very few have ended in success and nothing but bad press surrounds this "innovative" company of late with Vista issues, charges on Xbox problems and who could forget the almighty Zune.

Disclosure: Author is long AAPL & GOOG