Yahoo Shedding Entertainment Baggage in Order to Gain Relevancy

In Yahoo's third-quarter performance call yesterday, investors and analysts heard for the first time the lower-key, back-to-basics approach of co-founder and re-installed CEO Jerry Yang, and newly elevated president Susan Decker. There's evidence their strategy is already working, but the next move involves a carefully calculated approach to attracting customers that goes against the current trend.

It was the first quarter of doing business as Yahoo, the online search and advertising services company. Gone was the company's blind persistence in building a content generation and entertainment empire. Missing were most of the unique figures hailing from realms outside of digital information. It was Jerry Yang, the once and future CEO of Yahoo, and newly installed, back-to-business company president Susan Decker, without fanfare or grand accompaniment, representing the backbone of their redefined company, during yesterday's third-quarter financial performance call.

It was minus the stigma of former executives from Warner Bros. and ABC - in a sense, for the very first time, "just Yahoo." And the payoff from having trimmed its executive ranks, shed its reliance on entertainment properties, and refocusing on information and ad services appears to have been immediate: Revenue grew at a 12% annual rate to nearly $1.77 billion between July and September, the first full three-month period under Yang's and Decker's leadership. Net income did decline, but with charges from the acquisitions of Right Media and Blue Lithium, that was expected. What was not expected was that income would only fall by 4.7% annually, to a still-healthy $151.3 million.

"Over the past 100 days, we have thoroughly reviewed key aspects of the rapidly changing Internet marketplace, our company, our strategy, and our culture," Yang told analysts yesterday, "to identify what we need to do to accelerate Yahoo's growth and create long-term value for our shareholders. As a result, we have made important decisions about our future. We have defined a vision of where we want to go, we have developed a set of objectives and strategies that we will follow, and devise a rigorous framework that we will use to prioritize and make future choices."

It's not the type of message you'd expect to find scrolling along a marquee. But it's a back-to-basics philosophy that does resonate among shareholders. And while Yang represents the nurturing and positive side of the executive committee, Decker - who singularly personifies the triumph of conservative ethics over Hollywood adventurism in the company - is the one holding the hatchet.

"Our broader ambition is to focus our efforts around building platforms that attract third parties and user-generated content," Decker told analysts, "while de-emphasizing original entertainment programming and our premium music business."

To demonstrate her point, Decker cited recent comScore numbers for what she calls "anchor properties" - content categories that help users decide to make Yahoo their Internet starting point. "Three of these anchor properties - news, sports, and finance - now simultaneously hold the #1 comScore spot for the first time ever in their respective categories, in terms of both audience size and engagement."

Yahoo assists itself in search

Decker noted her company's rollout two weeks ago of its Search Assist feature, which is its first vehicle for delivering new algorithmic capabilities that predict user intent based on existing data about the user. "It understands when people need help finding what they're looking for, and suggests related search concepts to help them. By better understanding user intent, we believe the new Yahoo Search puts the best results with the most complete information, including multimedia integration, across video images and audio, right into the search results page for the most popular queries, such as music, movies, travel, sports, and much more."

This is important, because it demonstrates the type of video delivery platform Yahoo intends to be: Decker's vision has Yahoo focusing on data supplied from and gleaned from the individual user. It makes assessments of user intent based on what it's seen before, and with recent acquisitions of analytics tools including those from BlueLithium, it enables advertisers to direct their campaigns toward not only specified domains - which is coming in future Yahoo releases - but toward the intents of users within those domains.

The result, she sees, is video that responds to users rather than placating them. With candid clarity, she used Yahoo's own front page as an example of a problem she sees with video, as a blanket way of addressing some users with broad, generalized motions rather than targeted assessments. The performance of non-targeted video and multimedia is low, as assessed on Yahoo's own sites.

"The click-through rates on some of our algorithmic search results can be north of 40%," Yahoo's Decker illustrated, "which is ten times higher than that on the 'Today' module - the featured content at the center of our home page. A similar order-of-magnitude gap exists between the click-throughs on the large branded ads on many of the areas of our network, versus the content in the 'Today' module. Pricing for the ads follows suit. Search ad pricing could be multiples higher than ads elsewhere in the network.

"This difference exists in Search because we can match user intention to a much more comprehensive database of information," she continued, "while elsewhere we often don't take intention into account or, where we do, we match that to a more closed and less comprehensive database of information, content, services, and offers. Our objective is to apply the search relevancy paradigm wherever possible to create far more relevant experiences on Yahoo, both in content and in advertising."

For example, she said, it only makes sense for Yahoo to be showing off "American Idol" video, or pictures in the 'Today' module, to people likely to be Idol fans, or World Series highlights to likely baseball fans, "rather than showing the same content on the home page to everyone as we do today."

What would such a change mean financially? Naturally, Decker had already gotten out her calculator. A simple 1% change in aggregate network click-throughs, she determined, could generate two billion more page views for Yahoo per month. "That's the equivalent of four NYTimes.com sites, two ESPN.coms, or one Amazon.com," she concluded. And by making an example of this improved monetization through Yahoo itself, partners and advertisers might catch the hint.

One direction Yahoo will not travel

What may have come to a surprise to analysts - or rather, what should have come as a surprise, if anyone was listening closely enough - was Decker's assessment of what would not work for her company. Her strategic breakdown eschews what she perceives as a degeneration toward social networking.

"As we shared with you a year ago, social networking and a proliferation of publishing tools has fragmented user attention," she proclaimed, "and this trend continues - just the opposite of the situation in Search, which has become more concentrated with the top two players. On the advertiser demand side, this is creating significant friction for advertisers seeking to connect with the users they most want to reach. Similarly, there are major friction points on the publisher side due to closed networks, byzantine approaches to price discovery, and still-limited tools and technology. We believe these issues are the major reasons for rapid ad network growth in the last twelve months in the display world."

In other words, advertisers with major brands - what some refer to as "the Pepsis" and "the Nikes" - are choosing to go with traditional display advertising supplementing textual content, rather than invest in social network advertising with is "off-network" - disconnected from anyone's advertising exchange, including Yahoo's - and is thus walled off, exclusive, and non-dynamic.

If anyone believed Yahoo's next move was to acquire a major social networking service to somehow add to its newly acquired Right Media advertising exchange, Susan Decker has just axed that possibility. There are no new bubbles being blown up at Yahoo, just savvy executives with strategies and calculators.