Ho-hum earnings for the second quarter prompted Wall Street to whack 11.5 percent off Yahoo's stock price yesterday. But the question investors should be asking is when and how much the payoff will be for all the new stuff in Yahoo's pipeline.
Yahoo has spit out a bevy of innovations over the past year and has more rumbling around in its oversized belly, including a major push into Hollywood-style entertainment and smarter formulas for matching advertising to Web search results that it hopes will make its system as lucrative as Google's.
Yahoo already offers more editorial content than Google, but people don't click on its Web ads as frequently as Google's. Both factors make the Sunnyvale, Calif., firm less profitable than its arch rival because editorial content is expensive to produce and merchants who advertise in search results only pay when people click on their ads.
Now Yahoo is upping the ante on its costly content bet, in part because it thinks the value of original online entertainment will increase, as faster connections make video and audio increasingly prevalent on the Web. Yahoo is even opening spacious new offices in Los Angeles to get closer to the Hollywood companies whose content it hopes to enhance through partnerships and licensing deals.
In a conference call Tuesday, Yahoo chief executive Terry S. Semel declined to say when his new formulas for matching ads with search queries will debut. Nor did he reveal how many subscribers the company picked up in the two months since it rolled out Yahoo Music Unlimited, a discount song-rental service that cost less than half what rivals charge.
The service shook up the fledgling online music industry in May. Still in a limited trial phase, it gives subscribers unlimited listening access to more than 1 million songs for $60 a year and charges them 79 cents to download and "own" a tune.
Semel did say Yahoo was "pleasantly surprised" that subscribers are using the listening service's full variety of features, including sharing playlists and paying extra to own songs. "Even those that are subscribing are significant downloaders," he said.
Yahoo also is adding other services to give people new ways to communicate about music, news, video and similar content they find on Yahoo. "We are creating a social media environment that connects all forms of content and enables sharing and discovery among consumers,' " Semel said.
Among the "social" services the company recently introduced is Yahoo 360, which lets people create personal hangouts online to share photos, blogs and lists of favorite things. Another is My Web 2.0, which lets users search for and annotate Web sites, blogs and news stories, then store and share them with pals.
The company also spent $122 million on acquisitions in the recent quarter, including its purchase of Internet phone service provider Dialpad Communications Inc. and photo-sharing startup Flickr.
Yet several analysts expressed disappointment over Yahoo's second-quarter earnings released Tuesday that showed revenue rose 51 percent, to $1.25 billion. Profit jumped even more, buoyed by its $563 million sale of Google shares that Yahoo received after settling a legal scrap with its rival. Excluding the sale, Yahoo's net profit would have been $192 million, a few million less than analysts were hoping for.
But some think Yahoo is on the verge of another growth spurt, as Internet entertainment goes mainstream and advertisers shift more spending from TV to the Web. Semel suggested as much in noting that large advertisers today are spending 2 to 4 percent of their marketing dollars on the Web, while consumers, on average, are spending 15 percent of their media time online.
In a report issued yesterday, Derek L. Brown of Pacific Growth Equities said Yahoo and Internet advertising have already reached "an inflection point" that he thinks will propel Yahoo through years of "robust growth, expansion and market share gains."
David Edwards of American Technology Research also was bullish, writing that Yahoo "is currently being penalized because it isn't Google." Search-focused Google is more of a software company, he suggested, while content-rich Yahoo looks more like a media network.
Edwards noted that the number of Yahoo's fee-paying customers jumped in the quarter, to 10.1 million, up 58 percent from a year ago, generating $159 million in revenue. In addition to music, Yahoo charges for enhanced e-mail, fantasy sports games, personals and content bundled with access from such partners as SBC Communications Inc. Edwards said the increase supports his view that Yahoo is building a successful subscription business for enhanced services and content, helping diversify its revenue.
In addition to search ads, which account for the biggest portion of its money, Yahoo collects several hundred million dollars per quarter for display ads, which Google hardly sells at all. Yahoo declined to break out how much revenue it gets from each category, but analysts said its take from search is larger and growing faster.
Google, whose revenue eclipsed Yahoo's in the first quarter for the first time, is slated to report second-quarter results today.
Like Yahoo, Google has been adding services and content almost weekly. Yet it has largely eschewed human-edited content in favor of the computer-generated variety. As a result, its expenses are much lower: It had only 3,482 employees at the end of March, less than half the 8,800 Yahoo had at the end of June.
As I said, Yahoo is betting on content of the human kind. And I, for one, always root for the humans.
Leslie Walker's e-mail address is email@example.com.
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