Yahoo!

Case Analysis

May 9

2007
Jason Drohn Bradley Bierer Carol Woods Michelle Victory Paul Rapela

The strategy of implementation of an established dot com company, struggling to leverage current advertising methods with business objectives.

Table of Contents
Executive Summary......................................................................................................................... 3 History: ............................................................................................................................................ 5 Problem ........................................................................................................................................... 7 Competitive Analysis ....................................................................................................................... 9 Yahoo Financials............................................................................................................................ 12 Economics ..................................................................................................................................... 19 Demographics ............................................................................................................................... 23 Market Analysis............................................................................................................................. 30 CPM ............................................................................................................................................... 34 SWOT MATRIX:.............................................................................................................................. 36 QSPM............................................................................................................................................. 38 Space Matrix ................................................................................................................................. 39 Strategic Issues.............................................................................................................................. 42 Strategy Implementation .............................................................................................................. 47

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Executive Summary
Yahoo has grown up as a portal company. They learned early on that by being sticky, by having a web presence that forced users to stay on their site, they could find ways to profit from the page views. This has led Yahoo astray though. Not only has Yahoo given up overall profits in search of ever expanding user acquisition, they have allowed their search product to fall behind. Google, Yahoo’s chief competitor, has mastered the art of monetization, namely through contextual advertising. Contextual advertising is when a small piece of programming code is inserted into web pages which actually interprets the text and serves advertising based on keywords. Google’s offering, Adsense and Adwords, produces 99% of the company’s profits. This advertising network is built into both their search and branded sites. Web publishers are also growing to adopt Google’s version of website advertising to gain monetization for their own traffic. Yahoo has adopted this model of contextual advertising that has been so profitable for Google, but have yet to refine it enough to make a serious impact on the market. The program is still in beta (the internet’s way of saying under-construction) and has not made any headway at attracting new publishers or advertisers. The primary disconnect in the Yahoo model has been the lack of precision, because their search algorithm needs to be updated. The ad network fails to interpret that an article is written about cars, and serves ads about entrepreneurs. Money is only made if a user clicks on the advertisements. This is an interesting dilemma. 3

On the positive side, Yahoo has a brilliant banner serving system. Since Yahoo still sees itself as a portal, it still leverages Yahoo Money, Cars, Email, etc. Each of those sites has products or services that provide value to the user. A user shopping for cars is later targeted with banner ads reflecting the cars that they were viewing online. In our estimation, Yahoo needs to focus on core content by improving exactly what it is that makes them money. They should focus on improving their ad network’s efficiency and allowing all publishers admittance. They should leverage their banner serving software with the contextual market and provide growth that way. Google, the market leader, is simple and built around search. Yahoo needs adopt a like philosophy to remain competitive in their market.

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History:
Yahoo! Incorporated is an Internet service provider that serves both users and business globally. The company was founded in 1994 by David Filo and Jerry Yang who were attending Stanford University’s PhD program (The History of Yahoo!). Yahoo! Inc. began as a hobby for Filo and Yang and has now evolved into a multifaceted brand that serves internet users worldwide (The History of Yahoo!). Yahoo! Inc. has become the world’s largest global online network of integrated services (The History of Yahoo!). According to the Yahoo! Inc. website, they have become one of the leading search engines on the World Wide Web (The History of Yahoo!). Yahoo! Currently has 500 million users worldwide that visit the site each month. Yahoo! is provided to users in more than twenty different languages (Yahoo! Inc). The company also has office locations in Europe, the Asia Pacific, Latin America, Canada and the United States (Yahoo! Inc). Yahoo! Inc. is currently headquartered in Sunnyvale, California (Yahoo Inc). Yahoo! Inc. was incorporated in California in March of 1995 (Yahoo! Inc). Yahoo! Inc. first went public on NASDAQ in April of 1996. At this time Yahoo!’s stock opened for $13.00 per share (Yahoo! Inc.). At the close of its first day of the IPO, Yahoo! stock had reached a closing price of $33.00 per share (Yahoo! Inc). At this time the company only had 49 employees (Yahoo! Inc). The company was then reincorporated in Delaware in May of 1999 (Yahoo! Inc). In December of 1999 Yahoo! Stock was added to the S&P 500 (Yahoo! Inc). In 1996, Yahoo! Inc. began entering into joint ventures with SOFTBANK (Joint Ventures). Through this initial joint venture, Yahoo! Inc. was able to create Yahoo! Japan. Subsequently 5

Yahoo! Inc. has teamed with SOFTBANK to create markets in Germany, United Kingdom, France, and Korea (Joint Ventures). Yahoo! Inc. and SOFTBANK have also created GeoCities Japan Corporation to create and manage a Japanese version of the GeoCities website (Joint Ventures). Yahoo! Inc. has also teamed in a joint venture with VISA to establish Yahoo! Marketplace (Joint Ventures). This joint venture occurred in August of 1996 and has since then created a navigational service focused on information and resources for the purchase of consumer products and services over the internet (Joint Ventures). This joint venture alone created a new market for Yahoo! Inc (Joint Ventures). Most recently, in January 2006, Yahoo! Inc. and Seven Network Limited , also known as SEVEN, have teamed in a joint venture as well (Joint Ventures). SEVEN, an Australian media firm, signed an agreement with Yahoo! Inc (Joint Ventures). In this agreement, Yahoo! Inc (Joint Ventures). contributed its Australian internet business, Yahoo! Australia and New Zealand, and SEVEN contributed its online assets, television and magazine content (Joint Ventures). Yahoo! Inc. has a fifty percent equity ownership in the joint venture which will operate under the name Yahoo7 (Joint Ventures). Yahoo! Inc. also operates Flickr, a photo sharing and storing website (Yahoo! Inc profile). The company also provides its users with web mail, instant messaging, music, video, personals, and much more (Yahoo! Inc profile).

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Problem
Yahoo is a master of portals, but they have let their search product suffer. They have long built out their offering in such a way to add value to their users through functionality while they hoped that revenue would be made in the process. There was no clear attempt to either target those users with advertising or extend any real value added services. This portal terminology has run so deep that it is engrained in the Yahoo culture. Search is a product of users making their way through the Internet, rather than the core of their business. Yahoo sees their core business as being Yahoo News, Finance and Mail. They have made acquisitions such as MyBlogLog and Flickr. For what though? To extend functionality or to increase revenue. The all inclusive Yahoo is counting on the traffic to be monetized through private advertising deals and partnerships. Partners usually pay to have their service included in the Yahoo Directory in one form or another. These joint partnerships are encouraged because it not only brings Yahoo recurring revenue, but allows the partner a strategic place in the Yahoo network. The partnering service typically sees a boost in traffic, thanks to being networked with such a big web presence. Private advertising comprises the other side of the revenue deal. Private advertising is such that a company may put their banner in a prominent location of the Yahoo network. Similar to partnerships, the private sponsors are limited to the banner placements that are bought. For example, Newegg.com, a well known computer retailer, might put a banner ad on

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the Yahoo home page for $50,000 a month. This banner ad is then targeted to each and every user who enters the Yahoo home page. The problem is that web publishers, those that own their own websites are not able to capitalize on this revenue model. Yahoo promotions are concentrated to being served on Yahoo’s pages. Publisher’s do not have a chance to leverage Yahoo’s size and revenue potential the way that Google has empowered their users, through the contextual ad system. Yahoo is the most trafficked website on the planet. More pageviews are served from Yahoo servers than any other company in the world. Why is it that they are trailing Google in revenue then? Because Google allows other publisher’s to maximize the ad network. 82% of Google’s revenue is achieved not on their site, but on other web publishers.

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Competitive Analysis
As taken from the Yahoo 10K, “We primarily compete with companies to attract users to our website and advertisers to our marketing services. We expect the market to become increasingly competitive if online marketing continues to grow and gain acceptance on a global basis.” Yahoo’s primary competitors are Google, AOL, and MSN. All of which compete in the industry of “Internet Information Providers.” However, because AOL is held as a limited liability corporation and MSN is a division of Microsoft, data is not readily available for either section. This critique will have elements from both companies, including information taken from Microsoft’s 10K report and AOL’s few public records. The first key difference to note is the fact that each company differs in its primary company beliefs. Yahoo sees itself as a portal “to connect people to their passions, their communities, and the world’s knowledge (Yahoo 10K).” Google’s maintains the largest, most 9

comprehensive index of web sites and other content, and makes this information freely available to anyone with an internet connection. Their automated search technology helps people obtain nearly instant access to relevant information from our vast online index (Google 10K).” Microsoft’s offering, MSN, “provides personal communications services, such as email and instant messaging, and online information offerings such as MSN Search, MapPoint, and the MSN portals and channels around the world (Microsoft 10K).” AOL is simply an internet service provider who combines the leverage of the Internet with its own branded services. Although each of these competitors has aligned themselves in the same sector investment wise and serve the same relative target markets, they define their services differently. In some sense, this demonstrates how they align their business model as well. Google lives by its advertiser network, also known as the Google Network, comprised of Adwords and Adsense. The combination of the two services provides Google with 99% of their revenue. The revenue may be further divided between 18% on site advertisement and 81% off site advertisement. Adwords is an online application that allows businesses to publish their ads to the many websites that participate in the Google Network. Adsense is the destination for web publishers and site owners who have space on their website for ads. The webmasters make money every time a Google ad is clicked. Google is essentially the middleman. Yahoo takes a different alternative to the system. Being the most trafficked website on the planet, Yahoo sells ads for its own network of sites. But as the 10K notes, Yahoo sees itself as a gathering place for people to connect with their passions. Yahoo’s specialty ‘pre-Google’ has been monetizing its own web pages. 10

Yahoo’s ad network has proven effective on the front of intelligent ad serving. The algorithm is built in such a way that it can see where a visitor is going online, within the Yahoo network, and serves ads based on those tendencies. For instance, if you are looking at a car in Yahoo Autos and travel to Yahoo Money, you will see a car advertisement. This data is stored for an indefinite amount of time, so in three months a random car ad may show up again. Yahoo has only just recently launched an Adwords and Adsense competitor though. Yahoo’s service is named Yahoo Publisher Network. Yahoo Publisher Network allows the same functionality that the Google Network does, but is currently in beta. The company has yet to solidify its stance in the market concerning the advertising software. As Yahoo states in their 10K, “The principal competitive factors relating to attracting and retaining users include the quality and relevance of our search results, and the usefulness, accessibility, integration and personalization of the online services that we offer as well as the overall user experience on our website. In the case of attracting advertisers, the principal competitive factors are the reach, effectiveness and efficiency of our marketing services as well as the creativity of the marketing solutions that we offer.” They also add, “We believe that we are effectively competing in the Internet services market as we continue to refine our search technology, build onto our existing online properties and services, and further improve our users’ experience.” From this, one may conclude that Yahoo services play a key role in attracting and retaining users. Whereas, Google has recognized that search is their primary objective. 11

Yahoo Financials
Yahoo trades on the NasdaqGS under the symbol, “YHOO.” For slight comparisons, to show where Yahoo needs to be, we are going to compare several key statistics with Google’s results. With a 52 week range of 22.65 to 28.86 and a volume of 21,102,256; the stock itself is well traded. The current P/E of 55.57 seems high, especially when compared to the much more profitable Google; which has a P/E of 48.18. Here is a snapshot of the top level financials for Yahoo at the time of writing:

Across the top level, revenue has been strong as well since 2002. 2006 revenues come in at 6,425.7 (in millions). Looking at the company snapshot:

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However, in terms of Google, Yahoo’s chief competitor, there is a discrepancy. Google grew revenues to 10,604.9 (in millions) since the time of IPO offering in 2003. There revenue is as follows:

Key Ratios: Profitability – Upon further examination of Yahoo, the key ratios include:

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Cost of goods sold has increased as one might expect, throughout the ten year span of public trading. This is largely due to the increase of server space and supplemental acquisitions the company has made. These acquisitions include services like Flickr and MyBlogLog. Research and development is sitting at 13% in 2006, which is higher than Google’s (which comes in at 11.6%). This is a positive mark for Yahoo. The EBT, or earnings before tax, as dropped to 17.1% - from 48.4%. This is a cause for concern. Google’s stands at 34.9 to 37.8 for the last two years. In dropping to the profitability section, Yahoo’s tax rate is 41.7%, up from 30.2%. This is not the highest it’s been, though. In 2000 it was 72.7%. Google sits at 23.3%. Perhaps the biggest discrepancy I can see is that Yahoo’s return on assets dropped from 18.95% in 2005 to 6.73% in 2006. Google remains strong at 21.41%. Yahoo Growth rates are the most alarming section in this analysis though. Growth RatesYahoo’s growth rates are as follows:

As pictured above, Yahoo had amazing growth in the late 90’s and in 2003 and 2004. However, Google was has stormed on the scene, taking the search and advertising market that previously served with banner ads. You can see this reflected in Yahoo’s falling numbers. 14

Google introduced pay per click services which are the bread and butter of the new search giant. Google’s growth:

Google, having their initial IPO in 2004 has grown exponentially. 2004 was a big year for internet adoption, and the first year Yahoo had a true competitor. Since then Yahoo has fallen to 47.1% growth and 22.2% growth in 2005 and 2006, respectively. Even in the last quarter, Google posted a 67% increase, while Yahoo sank to a 13.4% increase. Cash FlowYahoo’s Cash Flow:

Yahoo’s operating cash flow was down last year, -19.9%, and their free cash flow growth year over year was down -47.6%. This could be because of several high priced acquisitions. 15

Google’s Cash Flow:

Google didn’t have a stellar year, in regards to cash flow and in comparison to their last couple, but they still remained in the positive, sitting at 45.6%. That number may have been reduced because of the YouTube acquisition.

Financial HealthYahoo’s financial health is a point of concern, because their cash and short-term investments have been decreasing year after year. Accounts receivable inventory has remained constant, and their current assets has been around 2% for the last five years. In regards to total current assets the company has noticed a drop year over year in Total Current Assets, landing at 32.6% in 2006. Intangibles and Long Term Assets are at 29.3% though. I would imagine these stem largely from their offices and datacenters spread around the world. The largest concerning factor in this financial analysis is the debt of Yahoo, as compared with Google. Yahoo has .9% Accounts Payable, but 9.1% of Accrued Liabilities and 2.8& Short Term Liabilities. Their Long Term debt is at 6.5% which they just picked up in the last 4 years. Altogether, Yahoo’s liabilities total is 20.4%, leaving the stockholder’s equity at 79.6% This might seem like an advantage to some, because they are leveraging debt to magnify earnings, but if you continue further down, the current ratio is 2.54 and the quick ratio is 2.4. The company isn’t going bankrupt, but has been trending down badly in the last four years. Google on the other hand demonstrates only 7.8% liabilities, allowing the other 92.2% to be owned by the stockholders. They have a Current ratio of 10 and a quick ration of 9.63. The following two pages offer printouts of the full financial statistics. 16

Yahoo’s Financial Health:

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Google Financial Health:

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Economics
Economics is defined as, “the social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.” There are many factors and indexes that are tracked to gauge the health of the economy. These include gross domestic product, consumer price index, and strength of the dollar, interest rates, and disposable income. Yahoo, Inc. relies heavily on accurate information pertaining to all these factors associated within our economy. Not just what the consumer is spending, more importantly how the economy is doing as a whole. Yahoo’s expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Since Yahoo derives most of their revenues from advertising, any decreases in or delays in advertising spending due to economic conditions could reduce their revenues or negatively impact their ability to grow their revenues. Yahoo relies on the value of their brand and a failure to maintain or enhance the company brands in a cost-effective manner could harm their operating results. (10K) Yahoo believes that maintaining and enhancing their brand, specifically those that contain the Yahoo name as well as those that do nothing, is an important aspect of their efforts to attract and expand their user and advertiser base. Yahoo has spent considerable money and resources to date on the establishment and maintenance of their brands in which they anticipate spending increasing amounts of money on, and to devote much greater resources strictly towards advertising, marketing and other brand-building efforts to preserve and most importantly enhance the consumer awareness of 19

their brands. The success of Yahoo is depended upon us, the consumers and much money we are willing to spend on the Internet. Spending and the availability of monies is not just a major concern with Yahoo, it is with all other Internet Service Providers. The fear is the increase of CPI indexes and the possibility of inflation. The consumer price index (CPI) is a tool used to gauge the economy. The CPI is most commonly used to measure inflation, and businesses use it as a guide in making economic decisions The CPI is an index of prices used to measure the change in the cost of basic goods and services in comparison with a fixed base period.(American heritage dictionary) The CPI includes all goods and services purchased by urban households. The prices that are used to calculate the CPI are taken from 87 urban areas throughout the country. The CPI is computed as a percentage of the cost of certain products as compared to a base year. (The American Heritage® Dictionary) The current base year is 1982-84, which equals 100 percent. Any number above 100 indicates that prices for that year are higher than in the base year. The most current CPI statistics from the Bureau of Labor Statistics (BLS) are for February 2007. During February 2007, the CPI rose by .5 percent to a level of 203.499. This figure means that consumer prices for February 2007 were 103.499 percent higher than in the base year. This was an increase of 2.4 percent since February 2006. The CPI is divided into several different sections. Sections include housing, food and beverage, transportation, and energy. The index for food and beverage increased .8, housing .4, transportation .1, and energy .9 during the same time period.

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When consumer prices rise, everything else seems to follow. The increases will affect Yahoo’s business relationships with the third-party content providers, which will become critical to their success. As competition for compelling content increases the prices at which they offer their content to them and potential content providers may not offer their content to Yahoo on terms that can be agreeable to them. An increase in prices charged by the third parties to them could harm their operating and financial condition. Further, many of Yahoo’s content licenses with the third parties are non-exclusive. Accordingly, other webcasters and other media such as radio or television may be able to offer similar or identical content. This increases the importance of their ability to deliver compelling editorial content and personalization of this content for users in order to differentiate Yahoo from Google and MSN. If Yahoo is unable to license or acquire compelling content at reasonable prices, if Google, or MSN broadcast content that is similar to or the same as that provided by Yahoo, or if they do not develop compelling editorial content or personalization services, the number of users of their services may not grow as anticipated, or may decline which could harm their operating and financial results. (10K) Interest rate changes will affect the operating expenses of Yahoo, their third- party affiliates’ and their competitors. Interest rates are controlled by the policy makers of the Federal Reserve Board.(FED) The rates established by the FED are used by banks and lending institutions to set the interest rates for loans and credit cards. By manipulating the federal funds rate, the FED tries to control inflation and keep the economy strong while preventing a recession. The FED sets this rate at a level to keep the financial and monetary conditions of the 21

economy in line and adjusts the rate for changing economic conditions. A change in these rates by the FED, or the expectation of a change, can trigger changes to the short term and long term interest rates, the foreign exchange value of the dollar, and stock prices. Changes in these rates affect the spending decisions of both households and businesses.(federalreserve.gov) The FED raises the federal funds rate to slow down economic growth and curb inflation. They lower the rate to stimulate a sluggish economy and encourage growth. Since June 2006 the federal funds rate has been stable at 5.25 percent. During the prior two years, the FED has raised the federal fund rate 17 times. Should we be concerned? Should Yahoo, Google and others be concerned? Yes, as noted earlier when the cost of items increases so will others soon to follow. The increase in interest rates will affect the anticipation of Yahoo’s much needed expansion into the world of cyberspace.

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Demographics
Internet World Stats (2007) reports as recently as March 10, 2007, Yahoo! has a potential global customer base of 1,114,272,426 people who access the Internet. The usage growth period charted is for the years 2000-2007. Of the data presented Asia, Europe, and the Untied States are the three top users of the Internet globally. Africa, Asia, Middle East, and Latin America/Caribbean reflect the largest usage growth while North America reflects the lowest growth percentage rate globally in the charted period.

WORLD INTERNET USAGE AND POPULATION STATISTICS Population ( 2007 Est.) Population Internet % of Usage, World Latest Data 14.2 % 33,334,800 398,709,065 314,792,225 19,424,700 233,188,086 96,386,009 18,439,541 % Usage Population Usage Growth ( % of 2000Penetration World 2007 ) 3.6 % 10.7 % 38.9 % 10.0 % 69.7 % 17.3 % 53.5 % 3.0 % 35.8 % 28.3% 1.7 % 20.9% 8.7 % 1.7 % 638.4% % 248.8% % 199.5 % 491.4 % 115.7 % 433.4 % 142.0 %

World Regions

Africa Asia Europe Middle East North America Latin America/Caribbean Oceania / Australia

933,448,292

3,712,527,624 56.5 % 809,624,686 193,452,727 334,538,018 556,606,627 34,468,443 12.3 % 2.9 % 5.1 % 8.5 % 0.5 %

WORLD TOTAL 6,574,666,417 100.0 %

1,114,274,426 16.9 %

100.0 208.7 % %

NOTES: (1) Internet Usage and World Population Statistics were updated on Mar. 10, 2007. (2) CLICK on each world region for detailed regional information. (3) 23

Demographic (Population) numbers are based on data contained in the world-gazetteer website. (4) Internet usage information comes from data published by Nielsen//NetRatings, by the International Telecommunications Union, by local NICs, and other other reliable sources. (5) For definitions, disclaimer, and navigation help, see the Site Surfing Guide. (6) Information from this site may be cited, giving due credit and establishing an active link back to www.internetworldstats.com. Copyright © 2007, Miniwatts Marketing Group. All rights reserved worldwide.

Internet World Stats (2007) illustrates that North America had the lowest usage growth rate by world region, but does reflect the highest Internet global penetration.

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Internet World Stats (2007) presents the following pie chart of the world Internet user.

The World Bank Group (2007) charts internet user data. The user data can be disaggregated into many forms of information such as: gender, age, frequency, and household income. The available information on the use of the Internet globally is inadequate in scope due to the limited number of countries which collect information and communication technology making it difficult to ascertain the market for global Internet industry (pg. 1). The United States provides the most information on the use of the Internet in the North American Region. The following World Band Group graph was last updated January 11, 2007. Demographics of Internet Users Below is the percentage of each group who use the internet, according to our December 2006 survey. As an example, 69% of adult women use the internet. Use the internet Total Adults Women 25 70% 69

Men Age 18-29 30-49 50-64 65+ Race/ethnicity White, Non-Hispanic Black, Non-Hispanic English-speaking Hispanic Household income Less than $30,000/yr $30,000-$49,999 $50,000-$74,999 $75,000 + Educational attainment Less than High School High School Some College College +

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83% 82 70 33

72% 58 69

49% 75 90 93

36% 59 84 91

The Pew Internet Organization (2007) provides valuable information on the demographics of Internet users in the United States. The information reveals a large block of the U.S. populace which actively uses the Internet. The largest segment of the U.S. populace is 26

the 18-29 age groups with an 83% usage rate. Following closely behind are the 30-49 age groups with an 82% usage rate and the 50-64 age groups reflecting a 70% usage rate. Race and ethnicity reflect percentage rates of White’s as the largest users of the Internet (pg. 1). American demographics (2007) says the Hispanic race is the fastest growing population in the United States. Changes in the Hispanic race have increased by 3.3% between 2004 and 2005 (pg. 12). Combing the American demographics (2007) and the information drawn from the World Bank Group (2007) chart data reveals, the Internet segment for the Hispanic populace is expected to grow as Hispanic’s trail only slightly in the percentage rate of White users. The World Bank Group (2007) chart reflects nearly half of the households with less than $30,000 in household income use the Internet. The usage rate does rise upward as the household income increases. The income level tops out with a 93% usage rate for household incomes of $75,000 plus. According to American demographics (2007) the average family income is $46,326 per year (pg. 2). Combining the American demographics (2007) data and that of the World Bank Group (2007) reflects that the Internet user rate in the United States is at 75%, as of January 11, 2007. The World Bank group (2007) charts shows Internet usage increases dramatically with the amount of formal education the user possesses. The users with less than a high school education are the lowest Internet users with only a 36% participation rate. More than half of those with a minimum of a high school education, 59%, use the Internet. Usage of those with

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some college has an 84% user rate. The chart tops out with users with a college plus education have an impressive Internet usage rate of 91%. According to the iNetShops (1998-2005) information page over 55% of the users access the Internet from their home computers. The 50 plus group is the highest age group which pays for their Internet access at home; other users are more likely to gain access to the Internet at work or at school. Interestingly, this reflects why the internet usage is 20-30% slower on weekends and the busiest days are Monday-Thursday. About 72% of the female and 87% of the male Internet users will access the web everyday. Nearly 45% use the web 1-4 times a day; while 41% claim more frequent use and 15% say they use it less. The iNetshops (1998-2005) research also reveals that the martial status of the Internet user is 40% married and 41% unmarried. The age group of 25 and under is about 75% single, whiles the age group of 50 plus is 75% married. The political affiliation of the American Internet user leads towards the Democratic Party, 25%, over the Republican Party, 21% of those surveyed. In summary, the demographics of the World Bank Group (2007) Internet chart reveals there is very little disparity between the male and female Internet users. This information reflects a trend for the gender of the American Internet user is shifting from a largely male percentage to a more equal gender usage percentage when comparing the data from iNetshop (1998-2005) to the World Bank Group (2007) data. The trend in the Internet market continues to change as faster technology is made available to more users. Leslie Taylor (2006) reports,

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“broadband penetration grew 13 percent last year to 95.5 million homes, which means 68 percent of active home Internet users now use a broadband connection, according to a study released last week by Nielsen//NetRatings.” Taylor’s information also discloses, the Internet is becoming a central medium in the daily lives of those who have internet access. Internet user habits are changing as the speed of broadband has increased the average person’s usage of the computer at home. Last year the average user used their computer 30.5 hours a month compared to 25.5 hours a month just two years prior. The increase in the number of hours of Internet use corresponds with the American demographic (2007) report, home internet users with broadband spent on average 33% more time on line that those using narrow band connections (pg. 2). As broadband continues grow in the Internet marketplace, the trends will be for the gender differential to continue to equalize. The growth in broadband customers will lead to more hours spent using the Internet which by extension should result in a growth in sales for the Internet providers.

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Market Analysis
The Yahoo! 10 K report (2007) states, Yahoo promotes their marketing services in a highly competitive and rapidly changing global Internet market. Yahoo! considers developing world-class marketing is their competitive advantage in the volatile market of cyberspace technology. The services are offered to advertisers and their customers in over 20 different languages and countries. Recognizing the different marketing needs of each distinctive market is a fundamental approach for Yahoo!’s marketing strategies. Segmenting each distinctive market into an individual geographic group, Yahoo! can manage and measuring each segment geographically. This enables Yahoo! to target the segment with customized marketing services unique to the particular geographic market. Yahoo!’s commitment to providing specialized marketing services to a diverse global advertising populace is evidenced through their staffing the international offices with indigenous personal. By utilizing the input of indigenous personal, Yahoo! represents good global corporate citizenship. Yahoo! can offer better customer service by providing for the unique cultural idiosyncrasies of each geographic market segment. The Yahoo! brand is a highly recognized service on the Internet both in marketing and search services. The marketing strategy to retain customer loyalty and to continue to build brand recognition is to provide top quality customized marketing services through three primary channels of communication: direct, online, and telemarketing. The direct sales team’s focal point is selling Yahoo!’s marketing services and solutions to large advertisers. Online sales are directed toward self-service programs which enable advertisers to tailor their websites to specific target markets by attaching links to the websites which directs customers to 30

advertisers’ products. Telemarketing’s focal point is providing marketing services to medium and small advertisers. Yahoo! recently combined the management of Yahoo!’s marketing services with their search services to better meet the demands of the customers. Combing the management teams under one managerial umbrella facilitates collaboration between the two services. Collaborative communication will synthesize Yahoo!’s internal strengths with new technological advancements to adjoin value-added components to their services. The combining action promotes Yahoo!’s competitive advantage strategy of continuing to provide customized advertising to attract, retain, and engage users while experiencing demographic changes in the geographic market segments. Yahoo!’s fundamental marketing approach is the continuance of product development and properly managing each market segment to ensure the Internet user is experiencing the best services Yahoo! can offer. Yahoo! ascertains their marketing sector is involved in each step of product development, management to understand our services, and the best method to convey the services to the advertisers and the Internet user. Yahoo!’s marketing program utilizes all forms of media to convey their products to the geographical audiences of existing and potential users. The media consists of: online, television, print, radio and outdoor advertising. The use of all forms of advertising is “to bring the right service to the right people at the right time” (pg. 12).

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The customized marketing strategy is consistent with the development under “Yahoo! Fusion Services” according to Joan Raymond (2001). The “Fusion Service” integrated an additional service in 2001 called “Yahoo! ?Buzz Index.” The Buzz Index “gives a snapshot of what’s hot and what’s not” with daily updates on data drawn from the visited websites which Yahoo! informs the advertisers with the derived data (pg. 1). The advertisers are enabled to make critical marketing amendments to adapt quickly to the changes taking place in their particular market share. By informing advertisers to the website visiting habits of their customers, Yahoo! continues to market their services to the Internet users (pg. 2). Yahoo!’s information pool is derived from another source Yahoo! has crafted into their marketing strategy. Yahoo! requires their users to register for their search services. A user in the registration process gives their “demographic DNA” away to the information data bank. Allowing, Yahoo! to aid the advertisers with additional data for their website designs (pg. 3). The data and service additions coincide with the customized marketing strategy centered on the geographical target markets established by Yahoo!. As Yahoo! strives to provide world-class marketing to the Internet user, Yahoo! has to adapt to the changes in demographic trends being experienced in the United States market. The marketing strategies which Yahoo! has in place at present will enable them to react quickly to geographic target market shifts. At present, according to statistics by the Demographics of the Internet User (2007), North America has the highest Internet usage penetration by population than any other global market. To provide for the customized service for the United States in particular, Yahoo! staffs sales offices in eleven major cities dispersed throughout the 32

states (Yahoo! 10K 2007, pg. 12). Target marketing the United States as one of their geographical market segments, Yahoo! should experience an increase in the user population as broadband technology reaches a larger high-speed Internet audience. Leslie Taylor (2006) states, monthly user time increases by 30% after the installation of broadband connections are made available to users. Yahoo!’s customized geographic market segment approach will be able to handle the emerging market trends and integrate the pooled data for advertisers to implement advertising tactics to increase market penetration.

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CPM
Competitive Profile Matrix Yahoo Google MSN

Critical Success Factors

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Ratin g

Scor e

Strong Brand Recognition Talented Employee Base Culture of Innovation/Accountability Advertising International Markets Powerful Business Relationships Customer Loyalty Market Share Total

0.15 0.10

4 3

0.60 0.30

4 4

0.60 0.40

4 3

0.60 0.30

0.10 0.15 0.20

2 3 4

0.20 0.45 0.80

4 4 2

0.40 0.60 0.40

4 3 3

0.40 0.45 0.60

0.05 0.15 0.10 1.00

3 4 3

0.15 0.60 0.30 3.40

3 4 4

0.15 0.60 0.40 3.55

4 3 2

0.20 0.45 0.20 3.2

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Yahoo!’s competitive profile matrix (CPM) weighs international markets, .20, as the most important item on the list of critical success factors. Yahoo!’s score on this factor is the highest in comparison to their two chief competitors, Google and MSN, reflecting a distinctive competitive advantage in the Internet market. Strong brand recognition has a weight, .15, assigned which replicates a high level of importance on the CPM. Maintaining strong brand recognition to retain market share is rated and scored highly in the industry by all three companies on the matrix. The customer loyalty factor weight, .15, discloses Yahoo’s ranking and score as second to Google; yet remaining ahead of MSN. The advertising factor weight, .015, rates Yahoo! and MSN equal; yet behind Google, the industry leader for this factor. Talented employee base weight, .10, rates and scores equal to MSN; yet lags behind Google. Yahoo! lags behind considerably in comparison to Google and MSN on the culture and innovation and accountability factor. The factor weight, .10, on Yahoo’s CPM does not reflect a high level in ranking the critical success factors, but does release valuable information in comparison to their competitors on the CPM. Yahoo! rates and scores the lowest on this factor. Market share weight, .10, shows Yahoo! is second to Google; yet leads MSN. Weighing the powerful business relationships factor the least, .05, Yahoo! ranks and scores evenly with Google; yet MSN holds the top score and rating on this factor.

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SWOT MATRIX:
STRENGTHS: 1) Yahoo! Inc. has beaten Google in the mobile market. 2) Yahoo! Inc. has many more auxiliary products compared to the competition. 3) Yahoo! Inc. has strong brand recognition. 4) Access is available to anyone with internet access. 5) Partnerships with MLB, VISA and NFL. revenues are falling due to Google and other competitors in the market. OPPORTUNITIES: 1) Internet video advertising spending expected to increase by 82% to $410 million by 2006. 2) Yahoo! Inc has purchased Flickr. 3) Broadband expansion. 4) Yahoo! has a strong and talented employee base. 5) Yahoo! Has penetrated markets that are still untouched by competitors. SO STRATEGIES: 1) S3 O1 : Revamp the current video site and encourage advertising on the site by using the strong brand strength and recognition of Yahoo!. 2) S5 O2: Use Flickr as a new means of advertising for the partnerships with VISA, MLB and NFL. 3) S4 O5: Use Yahoo!’s current expanded to market to target advertisers in these countries. WO STRATEGIES: 1) W1 O1: Use internet video advertising boom to strengthen Yahoo! video sites. WEAKNESSES: 1) Yahoo! is ranked 5 in visitors among video sites. YouTube which is owned by st Google is ranked 1 . 2) Yahoo! image search has been declining 3% per year. 3) Google search results generate twice as much revenue as Yahoo!. 4) Advertising
th

2) W1 O2: Use Flickr as a tool to developing a better video site. 3) W2 O2: Increase Flickr’s capabilities in order to reverse the decline in mage search on Yahoo!

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THREATS: 1) Google commands about 50% of all online searches and Yahoo! has only 24% according to Neilson/NetRating. 2) Consumer attitudes towards online advertising may become more negative. 3) Increasing strength of competitors. 4) Social websites such as MySpace and Facebook are now breaking into the online advertising market. 5) Google is surpassing Yahoo! in revenues.

ST STRATEGIES: 1) S3 S5 T1: Use Yahoo!’s brand recognition and its partnerships with MLB, NFL and VISA to promote searches on Yahoo!. 2) S3 T4: Use Yahoo! brand recognition to build a social website through Yahoo! Inc.

WT STRATEGIES: 1) W4 T1: Increase advertising for Yahoo! search engines to increase users.

After developing the SWOT matrix it seems to be in the company’s best interest to pursue a strategy that focuses on increasing their advertising revenues. Yahoo!’s most predominant strength is their brand recognition. In developing a strategy for Yahoo!, the company should use their strong brand recognition to entice more advertisers for their site. They also must concentrate their efforts on upgrading and advancing their target advertising capabilities.

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QSPM
KEY FACTORS OPPORTUNITIES: Internet video advertising expected to increase by 82%. Yahoo! Inc has purchased Flickr Broadband expansion WEIGH T Strategy 1 AS 4 4 4 TAS 0.8 0.4 0.8 Strategy 2 AS 3 4 4 TAS 0.6 0.4 0.8

0.2 0.1 0.2

THREATS: Google command about 50% of all online searches and Yahoo! has only 24% Consumer attitudes towards online advertising may become more negative Increasing strength of competitors Social websites are no breaking into the advertising market (MySpace) Google is surpassing Yahoo! in revenues

0.2 0.05 0.1 0.05 0.1 1

n/a 2 2 2 1

n/a 0.1 0.2 0.1 0.1

n/a 1 1 1 1

n/a 0.05 0.1 0.05 0.1

STRENGTHS: Yahoo! Inc has beaten Google in the mobile market Yahoo! Inc has many auxiliary operations Strong brand recognition Access available to anyone with internet access Partnerships with MLB, NFL and VISA

0.05 0.1 0.1 0.2 0.5

2 4 4 4 4

0.1 0.4 0.4 0.8 2

1 4 4 4 4

0.05 0.4 0.4 0.8 2

WEAKNESSES: Ranked 5th in visitors among video sites. YouTube owned by Google is 1st Image search has been declining 3% per year Google search results generate twice as much revenue than Yahoo! Advertising revenues are falling due to competition

0.1 0.1 0.1 0.2 1

1 2 2 2

0.1 0.2 0.2 0.4 7.1

1 2 1 2

0.1 0.2 0.1 0.4 6.55

Strategy 1: Google search results generate twice as much revenue per year than Yahoo! Strategy 2: Google Commands 50% of all online searches and Yahoo has only 24% Conclusion: Both strategies are desirable for the company. However, Strategy 1 is slightly higher in desirability at this time. Yahoo! Inc. should consider implementing a strategy that increases the desirability of their video site.

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Space Matrix
Conservative 3 2 1 0 CA -2 -1 0 1 2 3 Defensive ES Competitve 1 2 3 IS FS Aggressive

INTERNAL STRATEGIC POSITION FINANCIAL STRENGTH Market Capital Return on Equity Current Ratio Gross Profit Margin COMPETITVE ADVANATAGE Market share Customer loyalty Website quality Technological know how 39

EXTERNAL STRATEGIC POSITION ENVIRONMENTAL STABILITY Technological Changes Rates of Inflation Demand variability Competitive pressure INDUSTRY STRENGTH Growth potential Profit potential Financial stability Ease of entry into the market

FINANCIAL STRENGTH The market capital for Yahoo! is 37.25 billion, Google is 150.03 billion and the industry is 296.7 million. The return on equity for Yahoo! is 8.5%, Google is 23.26% and the industry is 12.1%. The current ratio for Yahoo! is 2.54, Google is 10. The gross profit margin for Yahoo! is 3.75 billion and Google is 6.38 billion.

RATING 2

1

3 3 9

INDUSTRY STRENGTH There is unlimited growth potential in the industry due to the increasing use of the internet. There is an increase in the amount of advertiser spending on the internet which will create high profit potential. The industry is stable due to the increasing use of the internet. New internet companies are not as lucrative as Yahoo! and Google so therefore the ease of entry into the market is relatively low. 20 ENVIRONEMENTAL STABILITY Technological changes are occurring rapidly. Inflation will hinder profit in overseas ventures. Demand is relatively stable for advertising on the internet. There is an increase in competitive pressure between Yahoo!, Google, MSN and other well known companies. -13 COMPETETIVE ADVANTAGE The market share is increasing globally. Customer loyalty is very low. Websites are increasing in quality and ease for all users. -1 -5 -1 -3 -5 -1 -4 5 5 5 5

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Technological changes are increasing the demand for technological experts.

-3 -10

CONCLUSION ES Average is -13/4 = -3.25. CA Average is -10/4 = -2.5. Directional Vector Coordinates: IS Average is 20/4 = 5. FS Average is 9/4 = 2.25 X-axis: -2.5 + (+5) = 2.75 Y-axis: -3.25 + (+2.25) = -1 Yahoo! should pursue conservative strategies.

The SPACE matrix has shown that Yahoo! Inc., should pursue a strategy that is conservative rather than aggressive, defensive or competitive. This along with the SWOT matrix shows that Yahoo! should pursue a strategy that increases their advertising revenue by upgrading their target advertising capabilities.

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Strategic Issues
As demonstrated in the QSPM, CPM, and SWOT matrix, Yahoo has significant issues in the category of search. As discussed in the previous sections of this report though, Yahoo sees itself as a portal company. A website who’s primary motive is connecting the world with it’s information. This is a fantastic goal, but one that Yahoo needs to abandon. Yahoo’s search product has suffered considerably, because of expansion into other areas. They grew up a purveyor of portals, but began to feel content in their search, forgetting that it was the reason people visited their site. Instead, the company focused supreme effort in the realm of content. Yahoo tried to remain ‘sticky,’ so that users would have incentive to come back. This precise area was long thought to be Google’s weakness. The lack of a ‘sign in feature’ would permit users to go elsewhere. Instead, it has brought more people to the site because Google is easy to use and not feature laden. The search feature is straightforward and simple. In addition, Google has added the advertising network, marketing the ads as a further enabler. There are four basic problems which are the source of Yahoo’s falling revenue and reduced cash flow. Those issues are:
Google’s Search results generate twice as much revenue as Yahoo’s search results. Advertising rates are falling due to Google and other competitors Google commands about 50% of all online searches, and it is increasing every quarter Increasing strength of competitors in the portal market

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Google’s search results generate twice as much revenue as Yahoo’s results: In 2006, Yahoo generated $6.4 billion in revenue. This total was up from $5.3 billion in 2005. Google, on the other hand, had revenues of $10.6 billion. In 2005, Google’s figures came in at approximately $6.1 billion. The reason? Search. Google has consistently honed its search algorithm to include the advertising network. This has led to very tight connections between keywords and ad placements. Advertisers pay when their ads are displayed next to relevant content, and only when they are clicked by a user. Furthermore, Google has opened up their advertising network to outside publishers; namely webmasters with smaller sites, buy who still generate traffic. When an ad is click on their site, the webmaster shares in the profit. Yahoo has begun development of a similar ad network which will take advantage of the large base of independent website owners. The problem is Yahoo will need to take these publishers away from Google’s products. This ‘beta’ program has been in development for over a year, and it is rumored that Yahoo pays a higher share of those ad dollars than their rival. The system is still flawed though, because advertisements which are displayed are not cohesive with the content provided. Therefore, Yahoo needs to invest time and money into perfecting the algorithm which serves those ads. Until then, they will remain in second place.

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Advertising rates are falling due to Google and other competitors At the time of this writing, Yahoo has hundreds of competitors in the PPC and web advertising market, but none are as uniquely positioned except for Google. Each of these minor competitors have less identifiable brands and little to no traffic to capitalize on. With the minor competition though, the average cost of a pay per click advertisement has fallen. The keywords which are the anchor for the advertisement process are starting to decrease in price because of increased competition through the entire sector. Google and Yahoo offer a premium service, so they charge more. Their competitors charge less so that they may capture customers, hence lowering the overall revenue of the larger companies. With Google’s prevalence and the minor competitors, Yahoo needs to clean up their ad serving algorithm before they will recognize a shift in their revenues. Google commands about 50% of all online searches, and it is increasing every quarter In order for Yahoo to challenge the quickly growing Google, they need to refocus on what their users are there for - search. It isn’t Yahoo Finance, Autos, or Groups; it is search. Plain and simple. When that search is cluttered, irrelevant, or wrong, it drives users away.

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Increasing strength of competitors in the portal market A portal is defined as “a starting point for Web activities.” Yahoo has done a brilliant job conveying this role to its users. They have spent millions of dollars to build out the site and acquire web commodities, all so their visitors will stay longer. The major weakness of this strategy is that there are competitors doing better. These competitors are social networking sites. Social networks are the sites that allow users to connect. They are wrought with user generated content, uploaded images, mailing capabilities, etc. They allow users to connect. Yahoo’s strategy of providing content which users sift through is being challenged. In Summary Yahoo is being challenged on four fronts, all tied closely to search. These include lower revenues in the advertising networks due to competitors, Google’s dominance in the search and advertising space, inefficient search results, and the changing face of portals. The company needs to come to the realization that search is their future, with advertising intertwined. Once their core competencies have shifted successfully from a portal strategy to a company relying on its search algorithm, they can begin to implement the advertising strategies that have proven useful in banner ad integration, for the contextual advertising market.

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The first step is refining their search algorithm, though. Yahoo may even combine their intense focus on portals to deliver more focused results in their queries. For instance, they can leverage the power of social networks and blogs, quantifying the links and keywords in a format that Google has yet to recognize. In short, Yahoo can be the dominant search engine by applying a new age search algorithm to its rankings. Coupled with this algorithm, they can deliver smarter text advertising. Yahoo is the only search engine that not only quantifies the linking text, or anchor words which transport you to another site, but also the surrounding keywords. For example, if a user is reading an article about spyware removal, and the link is placed in the word spyware, then Yahoo would be able to distinguish that three words before ‘spyware removal’ was the brand name of a piece of software. Then, if a user clicked on the link, they would instantaneously be served an ad for that spyware solution. This new advertising structure will need to be expanded to meet the demands of the independent webmasters in charge of various, niche sites. Payouts should be slightly higher because they are breaking into Google’s area. By Yahoo focusing on improving its search algorithm, they will be directly addressing their diminishing user base. People are leaving because the search results aren’t as relevant as Google’s. So change the algorithm to account for more factors than Google’s does. Advertisers are advertising with Yahoo because their implementation is faulty; their search engine is flawed. Clean up the search results, and that problem will disappear. 46

In the end, Yahoo needs to deliver a more value added product. Not in the form of more portal pages or more section to their website, but a more flawless search engine. The rest can be harnessed from that.

Strategy Implementation
Yahoo will move forward with one core competency, which is search. They will focus their resources on developing the algorithm necessary to key in on social networks and portals because of their background in the history. They will design and implement a better solution. Their ad network will be integrated into the search algorithm to pick up related keywords in linking text and content. This will be coupled with webmaster utilization so that outside publishers may benefit from Yahoo’s resources and advertising network. All in all, the outside influence will increase Yahoo’s revenue. The strategic implementation will follow this path:
1. Redirect Employees 2. Refine the Algorithm 3. Implement the Algorithm 4. Refocus the Advertising Network 5. Expand the Ad Network 6. Implement Outside Publishers

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Redirect Employees The strategic implementation will be such that no employees will be laid off. They will simply be redirected. The core mission of Yahoo for over a decade has been to focus as a portal. They were told to expand the network, not make it better. Their new initiative will be to forget about expansion, and refine the search capabilities of the site. Hence, forming the foundation of the new company strategy. The first thing that needs to be done is alert everyone of the change. This will take place in a top-down manner. First the upper level managers will be met with, then down from there. The first day, each of the 10,000 employees will need to be notified in one form or another. Depending on the shift patterns, or whether the managers believe it is necessary to alert them individually, they will all be contacted. In charge of the project will also be two individuals, one task oriented and one more inclined to deal with the emotional side. The next step will be redirecting employees work habits. For those who will be switching groups (going from the portal philosophy to the search initiative), they will be moved to different offices. Their desks, computers, etc. will be switched. They will have a new cubicle or office with the search team. Once there, it will be possible to start separating the individuals into team so that the search strategy can be attacked. Some will work through code while others will research.

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Refine the Algorithm This team will then come together under the two project managers, or under their supervision to some extent. They will apply the research and programming knowledge to plan out and refine a new algorithm for Yahoo. This will entail the variables of a groups who have been tasked with research. They are the ones who will provide the ideas and thoughts on the setup. The programmers will begin to put their thoughts into something a computer can interpret, otherwise known as coding. After the algorithm has been coded, it will be tested thoroughly. Those same researchers will be responsible for trying to break it. They will test for the validity of the page ranking techniques and make sure that everything is on par. If there are discrepancies, they will alert the managers and the programmers and come up with a solution as soon as possible. In traditional coding projects, up to 90% of the time is put into the planning stage. Therefore, the emotionally oriented leader will be the one coaching this session. The task oriented will issue objectives, but will play a sub-crucial role in the projects development. He will instead focus on the design aspects and how they relate to the coding. He will not be pushing the researchers to extraordinary limits. After the search is sufficiently refined, it goes to the implementation phase.

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Implement the Algorithm This phase is simply the rollout of the new search algorithm. The algorithm should be soft launched without any real marketing behind it initially. In order to successfully work, the mass of users need to test out the algorithm before it is marketed thoroughly. This stage will call for ‘all hands on deck’ to combat issues taking place in the algorithm itself. Emergency coding may be necessary as well. Once the launch has been successfully pulled off, it is necessary to market it efficiently. This can be done through online ads placed at high traffic sites, such as was done when Yahoo got their facelift six months ago. Refocus the Advertising Network With the successful product launch, it is now necessary to integrate the advertising software into the search engine. This can be done using the techniques used before the new algorithm, but using better keyword data which the new search algorithm is providing. The people who researched the algorithm will be tasked with promoting the new features on the website. They will be the soft touch of the advertisement relaunch, and led by the emotionally oriented leader. The task oriented manager will be at the helm of the advertising network relaunch.

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Expand the Ad Network The expansion of the ad network will include accepting new advertisers and publishers into the advertisement process. Infrastructure needs will be handled by the programmers. The researchers will be encouraging new publishers to sign up and handling the emails, while approving the new publishers. The Implementation of Outside Publishers As the final step in the relaunch, the coders will continue to refine the advertisement algorithms so that it ensures absolute targeting. The other employees will continue to handle the soft side of the business; getting new publishers, providing for the existing ones, and handling feedback. The Summary This search engine relaunch is a difficult and painstaking process, but it will refocus the business in the most profitable way possible. Having a good base to establish a advertising network is the best way to go forward for growth. If the search algorithm is failing, then an advertising network built on top of it will be leaking dollars. This strategy will help Yahoo maintain the brand while allowing it to refocus the core of its business.

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