Yahoo! falling behind with firm out of focus

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CHICAGO -- The big-league players in new media have suddenly found themselves split into two camps: the haves, like Google and Apple, that are making money hand over fist with leading new tech applications, and the have-nots, like Yahoo! and Time Warner, that are struggling to gain traction and revenue.

It's a split that many did not expect to occur so soon in the conversion process, with so many traditional media companies playing catch-up to their digital broadband future. In fact, the contrast between these media companies -- one analyst called it "pretty amazing" -- is stunning, especially in a week of quarterly earnings and other announcements.

It is important to understand why such Internet pillars as Google and Yahoo! have landed at opposite ends of the fortune spectrum. It primarily involves a difference in approach to technology and advertising.

Google continues to deliver on its corporate mandate to pioneer and perfect search and advertising applications. Declaring there is "no ceiling on its monetization," Google last week said that its third-quarter profit nearly tripled on the way to an estimated $3 billion in network income on more than $7 billion in sales this year.

It's worth questioning whether Google has an exceptional strength or is an example of the unfettered growth other industry players can achieve with sharp focus and execution.

The situation at Yahoo! doesn't provide a sure answer. The company has been waffling between being an "all things to all people" portal supported by online advertising and a supporter of branded and best-of-breed content. It didn't take much more than an aggressive and agile upstart like YouTube to upstage Yahoo! and even Google in the online video arena in just a year's time. With YouTube's more than 72 million unique users, 100 million in daily video traffic and online video infrastructure under its wing for a cool $1.65 billion, Google has bought itself some time to advance in this fastest growing of all media segments despite Microsoft's contention that it can build everything cheaper from scratch.

There's no telling what Yahoo! will do to pull itself out of the fire, even though it finally has gone live with its long-awaited Panama search advertising platform and acquiring ad-related rich-media service companies like Adinterax. Yahoo! last week reiterated its commitment to making video as ubiquitous as text, having aggressively supported efforts to create original content. Still, Yahoo! lowered its 2006 guidance to an operating earnings low of $866 million on a revenue low of $4.5 billion -- well below all prior estimates -- setting off a slew of analyst downgrades.

Options include buying other respected upstart social networking sites like Facebook for more than $1 billion. Others on Wall Street have a different idea. Jim Cramer, of Mad Money and TheStreet.com fame, last week suggested that Yahoo! buy itself loyal, demographically compatible users by acquiring such specialty Web sites as TheKnot.com and Bankrate.com.

Some investment bankers, itching to do more deals, have suggested breaking up Yahoo! -- primarily by selling off its China operations and spinning off the domestic core business to a bigger media player, with everyone from Microsoft to Comcast being mentioned. The fact that investors should be openly characterizing Yahoo! as a $34 billion takeover target just two years after it had been portrayed in the press as one of new-media's darlings should surprise no one.

Yahoo!'s tale is no different than that of Time Warner, which also has had in its clutches the opportunity to make great Internet strides by owning AOL. Instead, Time Warner has painfully squandered that option by focusing on all the wrong things, including milking its one-time core of 28 million subscribers for fees rather than focusing on advertising support for an otherwise free and open service, the model that AOL is only now embracing.

It's become a textbook case of how not to manage a new-world business. Now that Time Warner has filed to spin off its cable systems, Wall Street tongues are wagging about the likelihood of the company spinning off or selling AOL, which has been a strategic misfit from the start. Potential buyers of AOL could include Microsoft, Google, AT&T, Yahoo! and even Viacom, given AOL's more than $20 billion equity value with an estimated $2 billion in earnings on more than $7 billion in revenue this year.

AOL has 200 million monthly visitors, 113 million of whom are in the U.S., and generated $8.3 billion in revenue last year. Time Warner management has been selling off AOL's operations outside the U.S. and converting it to a free, advertising-based model, which will make it more attractive to buyers. But the lingering Time Warner-AOL debacle is not entirely due to the fact that old-line media management from Time Warner's other cable television, film and publishing businesses have been trying to run a new-media endeavor.

After all, Apple Co. CEO Steve Jobs did it. He took the company's once-losing proposition and transformed it into an equipment and distribution phenomenon simply by making it a point to better understand consumer behavior and desires and how that meshes with evolving interactive technology. That insight yielded an iPod nation because the funky little device and its steady upgrades tapped into a marketplace void for downloading, transporting and accessing content anywhere, anytime.

Ten million iPods later, the iTunes downloading tsunami that has lifted all boats at Apple drove up revenue from portable and desktop Macs 37% last quarter. The sale of iPods and Macintosh computers hit new highs last quarter, handily beating expectations. Clearly, Jobs is set to build the next major business on that foundation by launching the iMac home hub early next year ahead of competitors like Microsoft and Intel, who will be vying for control of the living room media hub in a more expansive way than the broadcast networks ever did.

And all of the major and wannabe content players -- including Time Warner -- will vie to be part of it.

So, just in the past week, there are several valuable lessons to be learned by reading the tea leaves in major company earnings and announcements. One is that you're never too big or bold a player to fall from grace. However Yahoo! digs itself out of its current quandary and better monetizes its 400 million monthly users, it already stands as an example of how an Internet giant can screw things up. Don't blame it all on Yahoo! CEO and former Warner Bros. co-chairman Terry Semel; Yahoo! founder Jerry Yang is still around and in charge.

Another valuable lesson learned is that so-called new- or old-media companies can't mine the fortunes to be made in a digital interactive world unless they intimately understand and cater to the individual consumer. Apple and Google are the best-of-breed examples. Still another lesson learned from all this emerging chaos is that advertising still rules when it comes to generating significant revenue and profit.

The contrasting performance, position and strategy of media players at this juncture provides an instructional edge to those willing to take a hard analytical look at what's happening to the marketplace and respond accordingly. Doing so ultimately will determine who sinks and who swims.
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