Question

Please conduct an external analysis using the industry dynamics (changes over time) model for the company Yahoo Inc.

Answer 1

COMPANY OVERVIEW:-

Yahoo! Inc. (Nasdaq: YHOO) is a global internet services company that operates the Yahoo! Internet portal. It provides varied products and content, from email and search to media streaming and downloads. Yahoo! was developed and first made available in 1994 by its founders, David Filo and Jerry Yang, while they were graduate students at Stanford University. Yahoo was incorporated in 1995 and is a Delaware corporation. The Company is headquartered in Sunnyvale, California, and has offices in more than 25 countries, provinces, or territories in which Yahoo! conducts business by offering products or services to local audiences (Yahoo 2008 Annual Report). As of February 2010, it is the third-most popular Internet site in the United States in terms of monthly traffic, with visits by more than 120 million unique users every month (Yahoo. Wikinvest). Yahoo's “marketing services" segment - which makes up its online advertising business - made up 88% of the company's revenues in FY2009 (Yahoo. Wikinvest). Google and Yahoo! are the recognized leaders in this market, but the balance of power shifted significantly since 2004, when the companies posted similar revenue and operating margins. Google has since eclipsed its main rival - in fiscal 2008, it generated 67% more revenue ($21.8 billion) than Yahoo! ($7.2 billion) with a profit margin over three times as high (19.4% vs. 5.89%) 2 (Yahoo. Wikinvest). Yahoo generates revenues by providing marketing services to advertisers across a majority of Yahoo! Properties and Affiliate sites. Additionally, although many of the services the Company provides to its users are free, Yahoo does charge fees for a range of premium services (Yahoo 2008 Annual Report). Yahoo provides services in more than 30 languages and in more than 30 countries, regions, and territories, including localized versions of Yahoo! in Argentina, Australia, Brazil, Canada, Chile, China, Columbia, France, Germany, Greece, Hong Kong, India, Indonesia, Ireland, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Peru, Philippines, Russia, Scandinavia (Denmark, Norway, Sweden), Singapore, Spain, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, the United States, Venezuela, and Vietnam (Yahoo 2008 Annual Report.

EXTERNAL ANALYSIS:-

Competitive Forces Analysis:-

Customer/Buyer Power (Overall, Weak Buyer Power). Yahoo faces weak buyer power because customers are fragmented and have little influence on price. No individual customer represented more than 10 percent of Yahoo’s revenues in 2006, 2007, or 2008 (Yahoo 2008 Annual Report). However, Yahoo faces intense pressure to offer attractive advertising packages to its clients, especially given Google’s dominant share of the paid search advertising business. The average bid price for keywords is declining, reflecting increased competition.

Threat of New Entrants (Low):-

The sheer scale of products and services that are offered by Yahoo, combined with its market dominance, makes the threat of comparable new entrants low, especially new entrants who are trying to compete head-on with Yahoo. Furthermore, the sheer magnitude of resources required for a new entrant (financial, technological, etc.), make the threat of new entrants low. However, the threat of new, customized portals is always considerable as new players that focus on niche markets can easily take away online advertising and retail and auction sales revenues away from Yahoo.

Threat of Substitutes (High):-

There are considerable substitutes for all of Yahoo’s product offerings and services. Such substitutes include search engines (primarily Google, as well as MSN and Ask), as well as niche players like Amazon.com, Ebay, Monster.com, MySpace, Facebook, and YouTube.

Degree of Rivalry (High):-

While Yahoo enjoys exceptional brand name recognition and commands a considerable market share, the truth is that switching costs in the industry are quite low. Significant Competitors include: Google, MSN, and Ask, as well as niche competitors like Monster.com, MySpace, Facebook, and YouTube.

Other salient points:-

Yahoo operates in the Internet products, services, and content markets, which are highly competitive and characterized by rapid change, converging technologies, and increasing competition. Yahoo’s most significant competition is from Google, Microsoft Corporation, and Time Warner Inc.’s America Online business, which each offer an integrated variety of Internet products, advertising services, technologies, online services and content in a manner similar to Yahoo. Yahoo competes with these and other companies, including social networking sites such as Facebook and MySpace.com, for users, advertisers, publishers, and developers. Yahoo also competes with these companies to obtain agreements with software publishers, Internet access providers, mobile carriers, device manufacturers and others to promote or distribute its services to their users. The Company also competes with advertising networks, such as Google AdSense, America Online’s Ad.com, as well as traditional media companies for a share of advertiser’s marketing budgets. The principal competitive factors relating to attracting and retaining users include the usefulness, accessibility, integration, and personalization of the online services that Yahoo offers, the quality and relevance of its search results, and the overall user experience on Yahoo Properties (Yahoo 2008 Annual Report). The principal competitive factors relating to attracting 4 advertisers and publishers are the reach, effectiveness, and efficiency of Yahoo’s marketing services as well as the creativity of the marketing solutions that the Company offers. In terms of the Industry Life-Cycle, Yahoo’s North American and Western European operations could be said to be in a Mature Industry, yet in the Developing/Emerging economies, the industry resembles more that of a Growth Industry.

Macro Environment:-

Macroeconomic Forces: Economic growth affects Yahoo to some extent. Specifically, in mature markets like the USA, a recession impacts Yahoo’s sales/earnings growth. Marketing services expenditures tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since Yahoo derives most of its revenues from marketing services, any deterioration in economic conditions causes decreases in or delays in advertising spending and is likely to reduce the Company’s marketing services revenues and negatively impact its short term ability to grow its revenues.

Demographic Forces:In Emerging/Developing Markets, the growing number of new and young consumers with disposable income spells significant opportunities for Yahoo. Many new markets have exceptional growth rates in terms of Internet penetration and proliferation, as well as Broadband growth.

Global Forces: Economic Growth in countries like China, India, Russia and Brazil afford further market share for Yahoo. However, in a number of international markets, especially those in Asia, Europe, and Latin America, Yahoo faces substantial competition from local Internet service providers and other portals that offer search, communications, and other commercial services. Many of these companies have a dominant market share in their territories and are owned by local telecommunications providers, which give them a competitive advantage.

Political/Governmental Forces: Yahoo is subject to U.S. and foreign government regulation of Internet, mobile, and voice over internet protocol, or VOIP, products and services which could subject the Company to claims, judgments, and remedies including monetary liabilities and limitations on its business practices. Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could adversely affect Yahoo’s business.

Technological Forces: The products and services offered by Yahoo have expanded and changed significantly over time, and are expected to continue to expand and change rapidly in the future to accommodate new technologies and Internet advertising solutions and new means of content delivery, such as rich media, audio, video, and mobile. In addition, the Internet and online services industry is characterized by rapid technological change. Widespread adoption of new Internet, networking or telecommunications technologies, or other technological changes, requires substantial expenditures to modify or adapt the Company’s services or infrastructure. New technologies could also block Yahoo’s advertisements or its search marketing listings, which would harm its operating results.