Industry Analysis and Foresight 1

Industry Analysis and Foresight 1

An Internet Search and Advertising Industry Analysis and Foresight

Tara Houdeshell, Cari Jewell, David Tinker

Muskingum University INFR 514

July 12, 2009

INTRODUCTION

A recent popular video from the site the climate of the competitiveness within the internet search industry, if not familiar with the video, the following are some captions from it, “Tired of search overload? Introducing “Bing” the better way to google, Bing helps you google the best choice faster and shows related googles right there on the results page. Bing knows what you like to google and Bing googles it based on your previous googles. Say you want to google hotels in Dublin, Bing can google that easily…” The title of this video is “Googling with Bing - The easiest way to Google since Yahoo!”.

This video effectively portrays, on a basic user level, the large market share and popularity that Google commands in the internet search industry. The word google has become synonymous with internet search. Overwhelmingly, the public no longer looks information up on the internet; instead, they are more likely to “google” it.

In an effort to gauge Yahoo!’s current position within the internet search industry, an analysis of the industry will be performed according to Michael Porter’s Five Forces model. This model will include Yahoo!’scompetitors and industry leaders, buyers, suppliers, potential entrants, and substitutes. In addition, an industry foresight will be explored that includes important trends of potential industry impact over the next 5-10 years to highlight future areas of focus and ways for Yahoo! to continue to remain an industry leader.

Company Overview

“Yahoo!”was started by Jerry Yang and David Filo, Stanford Electrical Engineering Ph.D. candidates, in a campus trailer as a way to keep track of their personal interests on the Internet. The reasoning for selecting the name Yahoo! is said to be because of its definition which means "rude, unsophisticated, uncouth." This is anything from where Yahoo! is today, with nearly 140,000,000 unique visitors every month.

Yahoo! became incorporated in 1995, headquartered in Sunnyvale, California, and since has established in over 30 different countries with 13,600 employees. Yahoo! offers services to its users falling into five main categories that include Front Doors; Search; Communications and Communities; Media, and Connected Life. Although the main source of Yahoo!’s revenue is generated from providing marketing services to advertisers through its properties and affiliate sites, additional revenue comes from premium services that Yahoo! offers for a fee, though most of its user services are free. However, these paid services are not what drive the company. Yahoo! states that it is committed to empowering its users and employees through programs, products, and services that inspire people to make a positive impact on their communities, including partnerships with nonprofit organizations such as Global Green, Network for Good, and DonorsChoose.

Yahoo! enjoys a market capitalization of 20.84 billion, ranked second to Google. On July 10, 2009 its stock price was $14.93 up 2.61% from the previous day and its price to earnings ratio was $35.55. When comparing the financial statements of other top companies within the internet industry, Yahoo! has fared similarly throughout the economic downturn. That being said, their operating profits are less than 5% of revenue. One year ago Yahoo! declined the offer to be purchased from Microsoft and is now realizing the competitive impact of its newly introduced search engine, Bing.

Internet Search Industry Competitors

Yahoo! competes in the industries of internet search, advertising, publishing and developing, ranking second in market capitalization of the internet information provider industry. Within the areas of Yahoo!’s core competencies the following companies are listed amongits top competitors: Google (GOOG), Microsoft’s Bing (MSFT), InterActiveCorp’s Ask.com (IACI), Amazon (AMZN) and Facebook (privately owned).

Google emerged as one of the top 100 search engine websites in 1998 and 11 years later enjoys the status of the top ranked internet search company. Bing is the newest search engine launched by Microsoft, replacing Live Search. It attempts to better serve its clients in their search requests by offering very focused and smarter results. Although search results appear similar to Google, Bing also displays a tabbed toolbar that directs users to more results based on their search. It is also hard to ignore that when searching on Bing, their efforts to get you answers faster such as when you point to a search result, without clicking, and a pop-up balloon appears displaying the first few paragraphs of text on the site. Bing has been gaining popularity in the U.S. where they have focused advertisement. Ask.com is a search engine that specializes in allowing users to get answers to questions posed in everyday natural language as well as traditional keyword search. Ask.com is the fifth most used search engine behind Google, Yahoo!, Bing (MSFT) and AOL according to CrunchBase.com.

Yahoo! also competes in retail sales (e.g. Yahoo! Shopping) and social networking (e.g. Yahoo! Messenger). The top two competitors in these areas of focus are Amazon and Facebook. Amazonrevolutionized the catalog and mail order industry fifteen years ago when it launched. Through efficient tracking of inventory, it has been able to generate a large amount of revenue from the sale of books from its own inventory and from the inventory of the tens of thousands of affiliated book sellers. Amazon has expanded to sell products including everyday household items and groceries. Facebook is the most used social networking site now on the internet. With more than 200 million monthly users, it out competes other social sites such as MySpace, Bebo, Orkut, Hi5, Friendster, and Twitter.

Internet Search Industry Buyers

Customers of Yahoo!’s services includebasic users, averaging between the ages of 25-44. Buyers include advertisers, publishers and developers. In April 2009 Yahoo!’s top 10 advertisers by number of advertisements were smarter.com, pronto.com, yahoo.com, nextag.com, bizrate.com, amazon.com, shopzilla.com, ebay.com, business.com and best-price.com. Unfortunately, the number of Yahoo! keywords purchased by advertisers has steadily decreased from month to month since January 2009.

Google’s customers are very similar to Yahoo!’s, the basic user, advertiser and developer. In April 2009 Google’s top 10 advertisers by number of advertisements were amazon.com, yahoo.com, nextag.com, target.com, ebay.com, bizrate.com, shopping.com, pronto.com, shopzilla.com and local.com. In January 2009 Google experienced a rather large decrease in the number of keywords purchased by top 100 advertisers; however, since then they have recovered half of their losses. In addition, Google remains the overwhelming choice for online advertisers as 80% choose Google. Comparatively, 33% of online advertisers choose Yahoo! and only 12% choose Microsoft.

Facebook’ buyers also include advertisers, as well as people who design, manage and or buy applications for Facebook. Additionally, since Facebook and application developers are able to aggregate data, researchers and companies that compile data lists are able to buy this very valuable information. Buyers for Amazon include college students, mail order customers, grocery buyers, publishing companies, companies wanting cloud space, and companies wanting to build their applications on Amazon’s open application programming interface.

Internet Search Industry Suppliers

Yahoo!'s suppliers include developers and third party entities who partner to provide internet services as well as broadband internet access providers. Some of Yahoo!’s most well known divisions and third party partners include: Flickr, del.icio.us, FoxyTunes, Zimbra and AltaVista. Google’s main supplier revolves around research and development, application building and the collection of more data on the internet. Like Yahoo! the acquisition of businesses as well as partnering with businesses play a large role in their supply chain. Examples of these acquisitions and partnerships include DoubleClick, Baidu, YouTube, Dodgeball and more.

Facebook suppliers include the basic users who add personal data and 950,000 application designers who build applications on Facebook’s open application programming interface. Other suppliers may include hardware and server makers, auditors who are required for investors, and media relations consultants who help Facebook navigate public relations. Ingram Book Group, the largest book supplier in the world is also Amazon’s largest book supplier. Other suppliers for Amazon include affiliate booksellers, written and music publishers, manufacturers, software, hardware and server makers such as HP, which provides 90% of Amazon’s infrastructure requirements, and delivery companies such as FedEx and USPS.

Internet Search Industry Potential Entrants

Potential entrants or future competition of Yahoo!, Google, Ask.com and Bing will certainly be companies that focus in the area(s) of Wikia Search, the semantic web, blogging/micro-blogging, mashups and social networking. Social media aggregators, companies who combine social media networks into one stream of information, such as TweetDeck, Seesmic and FriendFeed threaten to be potential entrants for companies like Facebook as well as traditional search engines like Yahoo!. Since 70% of Facebook’s users are outside of the U.S., social media startups in foreign countries are also a major source of potential entrants.

Amazon’s diverse product line allows for many potential entrants including new cloud storage companies, new e-commerce companies, reader product providers, and new publishing technologies. Additionally, web-based software providers as a service (SaaS) who are reducing the need for PC-based software purchases and web-based platform providers as a service (Paas)who are reducing the need for company owned information technology infrastructure can impact Amazon by reducing the total number of software and platform applications.

Internet Search Industry Substitutes

According to Hoover’s, television remains the most effective means of advertising. Television, newspapers and in-person means are all substitutes to the use of Yahoo!, Google, Ask.com and Bing for both search and advertising. Also substitutes for general search engines include specialized sites, such as WebMD, WolphramAlpha and Hunch.com. FriendFeed, LinkedIn, new or niche social networking sites like Ning, video sharing like YouTube and Hulu, and photo sharing sites like Flickr (owned by Yahoo!), are all substitutes to Facebook, because they address other features such as video and photos. Due tothe current unstable economy people are buying less, and the local library is currentlya substitute for Amazon. Additionally, the increased storage capacity of removable devices is a substitute for cloud computing needs.Big box discount retailers, such as Wal-Mart, which continue to enhance their on-line presence, are substitutes for Amazon.

INDUSTRY FORESIGHT

To better evaluate the future goals for Yahoo! to remain an industry leader in the next 5-10 years, it is important to have an understanding of Yahoo!'s current strategy. Yahoo! states that its focus is to present users with unique experiences by leveraging user participation, connections and data. Their goal is to remain a leading force by aligning with four key objectives that include expanding customer-centric culture and capabilities, creating leading social media environments, leading in next-generation advertising platforms, and by driving organizational effectiveness.

Recently Yahoo! has made announcements that it plans to enhancetheir financial results through partnerships with other companies to run sponsored search ads, such as Google, to advancetheir strategic objectives of becoming the "starting point" for a larger portion users on the Internet. By gaining user volume, Yahoo! believes it will be able to offer compelling value to advertisers, so they will see them as the "must buy" in online advertising. This should also provide more compelling evidence that Yahoo! is trying to protect and enhance stock value for shareholders.

Companies develop key partnerships and align themselves with projects that they believe will benefit them in the future. There are many other factors to take into consideration as well that can affect how a company is able to perform in the coming years. Some of these items can include the current state of the economy and expectations and trends for the future. The way in which money is spent affects not only the prices of products on the market, but also things such as the investment of companies to develop newer, cheaper products. Some of the other factors that are important for Yahoo! to utilize in developing industry foresight include technology trends, geopolitical and regulatory trends, and lifestyle trends.

Technology is one of the highest evolving industries in the world today. Every time you turn around a corner there is a new application or new device that promises to streamline and make life simpler than the previous. It is important to keep technology trends in mind when developing foresight as to how one can remain an industry leader. Some of these technology trends that Yahoo! needs to keep in mind include service-oriented architecture (SOA) and cloud computing, semantic web, and increasing access with mobile devices.

SOA represents the idea for delivery of software, hardware, telecommunications, call center, marketing, etc., as a service. Services working together to provide a more comprehensive offering is the underlying meaning of SOA. These services communicate by passing data from one service to another, or by coordinating an activity between more than one service. SOAs operate through current practices such as cloud computing. Cloud computing is how the delivery of these computing services occurs, i.e., typically over the internet.

Cloud computing users do not generally own many of the services that are supported and are essentially renting usage from a provider and only pay for resources that they use. The increasing availability of low-cost, high-speed Internet connections is one of the driving factors towards the rise of cloud computing and an IT services-based economy. The American Recovery and Reinvestment Act includes program funding to increase access to high speed internet for people in rural communities who are being underserved. The Pew Internet & American Life project has found than 63% of Americans use broadband internet, though this is fairly limited to urban areas. The ability to access high-speed bandwidth via broadband, mobile and wireless connections, allows companies access to cloud computing. These companies previously purchased physical software and hardware, installed and managed it locally, often incurring large costs with maintenance. With gaining access to broadband, there has become more need for cloud computing and demand will continue to grow.

Technology advances allow for continuing improvements in many aspects. However the use of technology varies in different regions. Some countries which do not allow a full free and independent press, have disabled internet access or require filters or certain features turned off. This can affect how a company operates, and plans for the future as well. An example of this is how Google disables some features, so that the Chinese government would approve its use. Some people have been able to get around this blockage by using access to the internet through their cellular phones.

Another important trend that is affecting how companies operate is through the change in the way they store personal information. The information stored by cookies is a problem for some regions. Search engines such as Google and Yahoo have had to adjust the length of time they store cookies and have had to make their personal information storage more transparent. Additionally companies such as Ask.com have added the “AskEraser” feature to their search engine to allow users to turn this on so that their search history is erased from the server within hours, to meet the emerging privacy trends within the search industry. The ability to meet the needs of users such as increasing privacy will play a key role as to the successfulness in the coming years.

The current state of the economy can also influence how a company plans to remain competitive in the near future. According to a recent survey by the telecommunications company Alcatel-Lucent, approximately 60 percent those interviewed in Europe, Asia, Latin America and the U.S. planned to cut spending during 2009. However the majority of users said services they considered essential included broadband internet, a landline phone, SMS/MMS (text messaging), TV, and a monthly or prepaid cell phone plan. Along with this, it is expected that the IT industry will remain at a rate of growth despite the current state of the economy, even though the growth may not be as high as expected. Users need to remain connected; they see it no longer as a luxury, but a necessity. By increasing applications available across numerous media will allow Yahoo! to remain an industry leader.