• Yahoo!’s primary revenue channels are losing steam, and according to my calculations will be all but exhausted in a couple years.
• Yahoo! should make some bolder moves and major investments (while it still can) to become a publisher of record again.

I’m not saying this because of some Nastradamian-based apocalyptic premonition, but because of the simple fact that the company can no longer sustain the core strengths that are necessary for its continued existence.

As much as I can surmise, revenue for the Sunnyvale-based Internet giant (if I can still use that term) stems from two main sources: display advertising and paid search.

Let’s take a closer look at these two business units, shall we?

Yahoo!’s Display Advertising
In May of 2009, comScore declared that Yahoo! ranked as the top display ad publisher for March of 2009 with 43 billion ad views, or 13% of market share.   For comparison, Facebook achieved about 25 billion ad views at the time (8% market share).[1]

Now fast forward the recession some more to a year later, where Facebook has leapt to the #1 spot with 16% share pushing Yahoo! down to #2 at 12% share.   For an even more dire perspective, this happened during a timeframe when Google Sites jumped to 2.4% from 1.3% a year ago and likewise, Fox Interactive jumped to 9.7% from 4.9%.[2]

Interest-based targeting of Facebook’s 500 million plus users and the encroachment of the DoubleClick Exchange will only continue to steal share from Yahoo!’s stock (no pun intended) pile.

Doing a (grossly) simple forecast, let’s assume that the market will continue to favor Facebook at the cost of Yahoo!, a pattern all too familiar for Yahoo! in the search engine world.

If Facebook were to grow at just 5% per year in market share at the cost of Yahoo!, by the end of March 2012, Yahoo! would stand at a towering 2% share.  If Yahoo!’s lucky, maybe the Turner Network will be looking for an acquisition by Q2 of 2012.

Yahoo!’s Search Advertising
Using a similar approach for Yahoo!’s search business, we can build a basic forecast of Yahoo!’s market share based on historical patterns for the past two years.[3] By June of 2012, Yahoo! should own about 2.5% of the search market as share is surrendered to Google’s dominance and Bing’s creative branding.

By then, will Microsoft even need the relationship for “data gathering” and “synergies?”  Maybe Baidu will need a cheap acquisition at that point to contend with Google in the domestic US market.

What Should Yahoo! Do?
I see two alternatives here: either (1) Yahoo! needs to drastically improve the way it acts as a content house and publisher, or (2) cut its losses, and begin the sale of its business units to the highest bidder in the market.

Tips for Scenario (1): 

• On the publisher front, aspire to be like the NYTimes.com to stay relevant and take more risks to experiment and adapt to the tectonic shifts of the digital terra.  I don’t need another dashboard (Yahoo! Mail) to tell me my friends’ latest Facebook updates or Ashton Kutcher’s last Tweet. Yahoo!’s recent announcement of a partnership with Facebook seems more like a cry for help than a line in the sand.  Yahoo! still has more unique visitors than Facebook.  They need to take advantage of that now, before it’s too late.
• It’s the same story on the search front, invest in the technological infrastructure to be a premiere search engine again.  Why does keyword canonicalization still exist?  What (again) is the difference between standard and advanced match types?  Improve your search results algorithm (not borrow Steve Balmer’s).  Show me a better desktop editor tool that’s less awkward and not based on Adobe’s AIR.

Tips for Scenario (2):

• Talk to Rupert Murdoch again.  In light of Facebook’s encroachment, I think Yahoo!’s board of directors is in a better place now to speak with MySpace’s patron saint.  Perhaps the two can unite their monetary and technological powers to make inroads into social media’s mobile front, advertising’s next frontier.

Yahoo! is losing ground on traffic share while outsourcing its search technology and data to Microsoft.  No company can operate as a shell forever.   Carol & Co. need to make some visionary changes.  Fast.

[2] http://www.webanalyticsworld.net/2010/05/facebook-top-display-ad-publisher-in-q1.html

[3] http://gs.statcounter.com/#search_engine-ww-monthly-200807-201006

Related posts:

1. A More …Perfect Union? – An Open letter to Microsoft and Yahoo! (or “The Search Marketer’s 12 Days of Christmas in July”)
2. Are content networks (Google, Yahoo, Pulse, etc) good for business?