Analyst: Yahoo Risks AOL-like Decline

NEW YORK Yahoo’s failure to grasp changes in Web user habits puts it at risk of following AOL as an early Web leader pushed into decline by fast shifts in the market, according a research analyst.

Safa Rashtchy, a senior research analyst with investment bank Piper Jaffray, sketched out the challenges facing Yahoo as an old-school portal in an increasingly fragmented, specialized Webscape in which users visit many different sites rather than one venue for all of their needs.

“Users have been moving increasingly to new sites, including social networking and video sites, as well as much smaller and less known verticals,” he wrote in a note to clients.

Yahoo has reported decreased advertiser demand in automotive, financial services and other unnamed areas. Despite its early lead in both community and video, the portal was surpassed in those areas with the rise of MySpace and YouTube.

Rashtchy said the dynamics echoed the shift to the open and ad-supported Web, which put AOL at a disadvantage with its “walled-garden” approach it subsequently abandoned to remake itself as a portal. Likewise, as users have shifted to new Web sites like social networks and video-sharing venues, advertisers are beginning to focus on reaching them there, he added.

“Yahoo will of course get a significant share of the budget, but we believe it is highly unlikely that it can again grow faster than the market,” he said.

Yahoo has benefited from a lopsided Web ad market, where the top sites have gotten a disproportionate share of the ad dollars. According to the Interactive Advertising Bureau, the top 10 online ad sellers received 72 percent of spending in 2005. Yahoo being an “easy buy may have made the company too comfortable with its strategy, ignoring the risk that big spenders could move away and Yahoo’s top brand could be leveraged only so much,” Rashtchy said.

Yahoo’s reaction to the changing environment compares unfavorably to Google’s, in Rashtchy’s estimation. In contrast to Yahoo, Google gets kudos from the analyst for signing deals with new traffic sources, like its ad pact with MySpace and acquisition of YouTube. Yahoo has also fallen behind in search with the delayed launch of a more sophisticated ad system.

“The critical issue [for Yahoo] is if the management and the board has the resolve to be aggressive and agile and restructure the company quickly,” the analyst said.