Yahoo's Profit Takes a Nosedive

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Yahoo's Profit Takes a Nosedive
Ad Business Falters Against Rival Google

By Sara Kehaulani Goo
Washington Post Staff Writer
Wednesday, January 24, 2007; Page D01

Yahoo reported a 61 percent drop in quarterly profit yesterday, capping
a year in which the online giant lost ground to Google, its biggest
rival for online advertising.

Yahoo executives acknowledged that the company is trying to find its
footing after a year that included a key technology delay, a corporate
restructuring and relative weakness against its rivals in the online
advertising business. This year, Yahoo and Microsoft hope to make big
inroads in their fight against Google, which dominates search-engine
advertising and continues to gain market share.
Yahoo chief executive Terry S. Semel said he expects a new ad system to
show results by the second quarter the year. (Yahoo)
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"I'm confident in our ability to capture new opportunities," chief
executive Terry S. Semel said yesterday in a conference call with

Profit fell to $269 million in the fourth quarter, from $683 million in
the fourth quarter of 2005. Revenue rose 13 percent, to $1.7 billion,
during the quarter. For the full year, profit fell 60 percent, to
$751.4 million.

The Sunnyvale, Calif., company is pinning hope for a financial comeback
on a new search-engine-based advertising system called Panama. After
delaying launch of the system for technical reasons in 2006, Semel said
Panama would start to improve revenue in the second quarter this year.

Meanwhile, Microsoft has launched its program, adCenter, which allows
advertisers to better target ads toward online customers.

"It's a very, very critical year" for both Yahoo and Microsoft, said
Scott Kessler, equity analyst at Standard & Poor's. If their attempts
to improve their advertising revenue fail, it may prompt another major
reconsideration of their strategies, he said.

Yahoo is the first of the major Internet brands to report year-end
financial results; Microsoft is scheduled to report tomorrow, and
Google's report is due Jan. 31. Yahoo released its report after the
stock market closed yesterday. Shares fell 46 cents, to $26.96.

Yahoo restructured its management team last month after a
well-publicized leak of an internal memo criticizing the firm's lack of
strategic focus. The memo said Yahoo was spread too thin as it tried to
develop too many products across too many divisions.

One particularly troubling trend to Yahoo watchers is that the company
is starting to lose its footing in display advertising, one of its
strongest businesses. Yahoo, with 500 million users, still has the
heaviest traffic of any Web site, but Kessler said popular
social-networking sites such as MySpace and Facebook are cutting
Yahoo's traffic and revenue growth.

Despite months of speculation that Yahoo was considering buying
Facebook, there has been no deal. It was Google that struck a deal with
MySpace to place ads on its site. Google also bought the video site
YouTube for $1.65 billion last year.

"Yahoo chose to go it alone" against some of the new Web sites that
incorporate video and social networking, Kessler said. Some of those
sites are cutting into Yahoo's market share, "and very well may be
doing the same when it comes to advertising," he said.

Some analysts hoped that Yahoo would turn a corner this year. In a
report released last week, titled "Darkness before Dawn," Morgan
Stanley analysts Mary Meeker and David A. Joseph wrote: "Often times
things can appear at their worst just before they show marked

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