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Friday, August 03, 2007

Yahoo! Search Web 2.0 Strategy

In a web 2.0 world dominated by sites like YouTube (owned by Google), MySpace and Facebook, Yahoo! is quietly making some incremental improvements to the Yahoo! Search product which could position the company to gain market share from Google. Yesterday, Yahoo! Search launched a music artist shortcut feature. Here's an example of a search for one of my favorite musicians, Moby:

Moby on Yahoo Search

Nice! The web 2.0 buzz these days is all about social networking sites (MySpace, Facebook, etc), but search is still where the money is. By integrating aspects of social networking (popular video and music) into its core search product, Yahoo! is making its search product more appealing to people who are currently using Google for search and sites like Facebook and MySpace for social networking.

As I mentioned in What Should the New Yahoo! CEO Do First, if Yahoo! can integrate its other properties into Yahoo! Search (like they've done with Answers), these incremental improvements could allow them to gain market share from Google. So, the first step is to improve the front end product. Too much emphasis has been placed on Panama, improvements to the back end advertising platform. Doesn't matter what happens on the back end if the front end doesn't have the traffic. Now, once they've made Yahoo! Search a sufficiently better experience than a search on Google, they can sell more ads against those search results. However, they do still need to allow advertisers to buy ads only on Yahoo! Search.

I think Yahoo! is actually in a pretty good position here. Maybe if they fix the back end advertising platform after finishing front end improvements, I'll sign up to be a Yahoo! Search Marketing ambassador again. ;-)

Looking at this from a stock investor's point of view, Yahoo! (YHOO) seems cheaper on a price to operating cash flow basis (P/OCF = 22) compared to Google (GOOG) where P/OCF = 36. That's looking at the trailing twelve months, though. It's all about future growth. In that regard, Google seems cheaper with a forward P/E of 26.10 compared to 40.56. Depends how much you trust the forward estimates. Plus, if Yahoo! can take search engine market share from Google, that'll decrease Google's growth rate in favor of Yahoo! (So you don't think I'm biased, I currently own shares in both GOOG and YHOO and manage advertising accounts with both companies. I think there's room for both companies to succeed.)

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