To Grow Again, Yahoo Might First Need To Shrink

There’s a one-word answer for why Yahoo has struggled to grow in recent years: mobile.

Yahoo’s business was built on a desktop-centric model that mobile is corroding faster than Halloween candy on pre-teen teeth. To find its way to mobile growth, it might have to shrink its PC-focused business.

To appreciate the company’s mobile vulnerability, it’s instructive to reflect on its history. Yahoo started as a directory of web pages. From there, it was an easy step to content aggregation. Rather than requiring users to search its directory for sites of interest, it could simply allow those users to select which directory listings they wanted most and put them together in one easy place. Yahoo monetized this audience by running display ads that advertisers could buy based on users’ content interests.

If smartphones had never existed, this model might have flourished. But smartphones do, of course, exist, and they create Category 5-level headwinds for Yahoo. Here are just four of the reasons why.

  1. Websites are out. Apps are in: Because apps offer faster performance and often consume less bandwidth than websites, consumers have flocked to apps for everything that websites long have dominated on PCs. More than half of all digital time spent by Americans is now spent in mobile apps.

  2. Aggregation is out. Specialization is in: Smartphone users typically face two constraints unique to the medium: time and screen size. As a result, publishers have disaggregated tools into unique apps that enable a user to get exactly what she wants when she wants it. In addition, in the PC world, Yahoo is really a publisher brand, like Hearst or Gannett. Its value comes from content Yahoo surfaces: Huffington Post, Reuters, and many others. As standalone apps, which you’ll find on Yahoo’s mobile home page, and you’ll see that how weak its brand is. Yahoo Weather, Finance and Sports have significantly lower value than Weather Channel, CNBC or ESPN, for example.

  3. Traditional display is out. In-feed, identity marketing is in: On smartphones, when banner ads aren’t being too small to deliver meaningful messages, they are too intrusive. Cookie-based targeting is imprecise. Not surprisingly, click through rates (CTRs) are abysmal. and ad blockers are on the rise. Instead, advertisers are flocking to in-feed ad units that allow advertisers to use their own CRM data to find consumers on Facebook, Twitter, Pinterest, and others. These ad units often have CTRs that are 10x higher than traditional display.

  4. The Yahoo brand is out. Gmail is in: It’s unfortunate, but I know several people who, upon receiving an email address ending in @yahoo, @aol, or @hotmail, assume the sender is older and less tech savvy. I believe that much of that perception is a product of former Yahoo Mail users who abandoned the service because of ineffective spam filters or being hacked and are convinced the service is spotty. They can’t understand why anyone would stick that.

Not surprisingly, Yahoo’s Q3 2015 quarterly earnings report shows a company under-performing. Revenue from mobile increased by 31 percent, but that’s barely half of what eMarketer projects to be a 59 percent increase in U.S. mobile ad spending YoY in 2015. Factoring in the company’s cost of acquiring traffic, display ad revenues are slightly down QoQ and slightly up YoY. For a cogent summary of Yahoo’s tough quarter, read Radio-Free Mobile’s report here.

Can Yahoo be fixed? Maybe, if it is prepared to get smaller in the near term as it invests more in mobile and moves away from its legacy PC business. Here are some of the things that would have to happen:

  • Migrate My Yahoo users to mobile: I don’t know how many millions of people have My Yahoo home pages, but I’d find a way to recreate that experience on mobile via an app.

  • Re-aggregate their mobile My Yahoo experience: One reason publishers have disaggregated is to make task performance more efficient. Much of Yahoo’s experience, though, is dependent on different content types, which are easy to aggregate. There’s no reason why Yahoo needs a separate news app from, say, its sports app.

  • Fix – or kill – its products: Just as McDonald’s has poured resources into fixing its food quality and, in some cases, trimming menus to simplify supply chain, ordering and food prep, so, too, should Yahoo. My wife, a personal trainer, still can’t get Yahoo’s Fitness feed to surface in her My Yahoo page. Poor quality has to stop, but if it can’t, or if the company can’t rationalize competing in a segment dominated by stronger incumbents, it should eliminate that product or service.

  • Adopt identify-based marketing: Yahoo possesses millions of email addresses. This would enable the company to combine an interest graph, similar to what Flipboard just announced, with advertisers’ own CRM data to help advertisers perform at the middle or bottom of the funnel.

As more digital activity migrates to mobile, the pressure on Yahoo to accelerate its transformation will only increase. I believe there’s a way out, but that may require proactively hastening the decline of its PC-based business, long its core strength, to pave the way to mobile. Yahoo might have to shrink in order to grow again. That won’t be easy, but it may also be the best of several unsavory options.

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