SAN FRANCISCO -(Dow Jones)- In 1999, it would have been presumptuous to compare the fledging online search company Google Inc. (NASDAQ-NMS:GOOG) (GOOG) with the world's most popular Internet portal, Yahoo Inc. (NASDAQ-NMS:YHOO) (YHOO).
Making that comparison today would insult Google (NASDAQ-NMS:GOOG) , which has thoroughly dominated the so-called Web 2.0 era through its superior ability to match ads with search terms.
Yet, the Google (NASDAQ-NMS:GOOG) of today finds itself in a position similar to the Yahoo (NASDAQ-NMS:YHOO) of old: Both are quirky-named companies with a corporate counter-culture and a seeming control of the Internet world. However, Yahoo's (NASDAQ-NMS:YHOO) inability to react quicker to changing user patterns, evolving Internet business models and a weakening economy sent that stock into a multi-year tailspin that it is still trying to fix - a fate that Google (NASDAQ-NMS:GOOG) is looking to avoid.
"People felt these companies could do no wrong in 1999 and 2008. Now that Google's (NASDAQ-NMS:GOOG) stock has fallen 40%, the tough questions are starting to manifest themselves," said Scott Kessler, analyst at Standard & Poor's. "I'm not sure that they are prepared for this kind of environment."
To be sure, the Internet economy is more mature than when the tech bubble burst earlier this decade, and no one is predicting that Google (NASDAQ-NMS:GOOG) will lose 95% of its market value, as Yahoo (NASDAQ-NMS:YHOO) did in less than two years. Nonetheless, investors are warily watching how Google (NASDAQ-NMS:GOOG) responds to looming challenges to its text-ad business, as well as an economy that is expected to slow even further.
"The business may not be as recession-resistant as we originally expected," Morgan Stanley analyst David Joseph wrote in a recent note.
Yahoo (NASDAQ-NMS:YHOO) may have thought it was invincible in 2000 as it operated a portal through which neophyte Internet users could access a range of content and services, a strategy that enabled Yahoo (NASDAQ-NMS:YHOO) to capture a huge share of online advertising. But Yahoo (NASDAQ-NMS:YHOO) relied heavily on ads from other Internet startups, a critical detail when the dotcom boom began to implode.
The implosion put Yahoo (NASDAQ-NMS:YHOO) under intense pressure to diversify its revenue base by chasing old economy advertisers, selling subscription services and developing entertainment content. But despite new leadership, a talented staff and the goodwill of its huge global audience, Yahoo (NASDAQ-NMS:YHOO) was never able to recapture the initiative as users turned away from portals and increasingly came to rely on Google's (NASDAQ-NMS:GOOG) search engine to guide them around the Internet.
Rival Microsoft Corp. (MSFT) last month delivered what most observers suspect will be Yahoo's (NASDAQ-NMS:YHOO) coup de grace when the software company made its unsolicited $ 41.4 billion takeover bid.
Behavior Shifts
But as happened to Yahoo (NASDAQ-NMS:YHOO) , Internet users again are shifting their behavior - they are now searching less and spending more time on social networks such as News Corp.'s (NYSE:NWS) (NWS) MySpace and startup Facebook, where they bypass search engines and seem to ignore ads. ( News Corp. (NYSE:NWS) owns Dow Jones & Co., publisher of The Wall Street Journal and Dow Jones Newswires.) Google (NASDAQ-NMS:GOOG) was quick to recognize the threat, and the opportunity, but its early attempts to monetize ads on MySpace haven't gone well.
Shifts in user behavior are a concern given that Google (NASDAQ-NMS:GOOG) , like Yahoo (NASDAQ-NMS:YHOO) before it, is heavily dependent on a single source of revenue - in this case, text-based search ads. Worries about Google (NASDAQ-NMS:GOOG) being a one-trick pony were easy to dismiss as long as it continued to rack up stellar growth.
Now the Internet search titan is also looking at a deteriorating economy with no real insight into how an advertising slowdown will affect its revenue. A recent report showing the company's paid "clicks" fell from December to January - a drop Google (NASDAQ-NMS:GOOG) said was due to tweaks to its technology - drove the stock lower.
Google (NASDAQ-NMS:GOOG) , which declined to comment for this article, is by no means standing still. It is attempting to expand its advertising base by developing and buying technology that will enable it to serve up display and video ads on the Internet - and eventually on mobile phones as well. The search giant is also rolling out a platform that lets marketers place ads on radio, television and in print media. But Google (NASDAQ-NMS:GOOG) has little to show for its efforts so far.
"The early results are underwhelming," said James Hering, chief innovation officer at Interpublic Group of Cos (NYSE:IPG) .' (IPG) TM Advertising in Dallas.
Hering predicted that Google (NASDAQ-NMS:GOOG) will at some point approach marketers with a plan to take control of a percentage of their advertising budgets and deploy them methodically across its search, display, radio, television and print ad network. The aim, he said, would be to let Google's (NASDAQ-NMS:GOOG) algorithms determine the best way for advertisers to spend their budgets.
Yet, Hering said Google (NASDAQ-NMS:GOOG) has a long way to go to prove that its multiplatform approach will work. Elizabeth Ross, president at Omnicom Group Inc.'s (NYSE:OMC) (OMC) Tribal DDB interactive advertising agency, added that it has been relatively easy for Google (NASDAQ-NMS:GOOG) to count when Internet users click on text ads, but she said measuring how consumers respond to brand messaging will be far more difficult.
"The problem is that they have an inherent belief that they can do anything - and do it well. That has blinded them to the realities of advertising," said Ross. "There are a number of soft metrics that go into advertising that I don't think Google (NASDAQ-NMS:GOOG) understands."
But if Google's (NASDAQ-NMS:GOOG) challenges echo those of Yahoo (NASDAQ-NMS:YHOO) during the dotcom implosion, observers said there are a couple of critical differences that should help the search titan overcome them. For one, Google (NASDAQ-NMS:GOOG) has moved aggressively from a position of strength in hopes of staying ahead of dynamic Internet trends, while Yahoo (NASDAQ-NMS:YHOO) was seen to have reacted too slowly to counter Google's (NASDAQ-NMS:GOOG) rise.
Meanwhile, the Internet is far more developed now than in 1999. Online ads accounted for more than 7% of the $284 billion that U.S. advertisers spent last year, and Google (NASDAQ-NMS:GOOG) is well-positioned to benefit from the migration from traditional media to the Internet.
Perhaps more importantly, Morgan Stanley's Joseph argued that Yahoo (NASDAQ-NMS:YHOO) ran into trouble at a time when Internet advertising was a relatively expensive impression-based business that provided no clear return on investment for marketers. Google (NASDAQ-NMS:GOOG) , on the other hand, has repeatedly argued that it has developed the most measurable advertising system in the world. And the company insists that advertisers navigating a recession will be far more likely to spend on Google (NASDAQ-NMS:GOOG) search ads because the company can prove they are effective.
"Advertiser enthusiasm about Google's (NASDAQ-NMS:GOOG) current - and future pipeline - products remains strong," said Joseph.
Indeed, many industry insiders and analysts remain convinced that Google (NASDAQ-NMS:GOOG) will continue as the dominant Internet player for many years to come. Of course, it would have been hard at the beginning of 2000 to imagine that Yahoo (NASDAQ-NMS:YHOO) would a few years later be fighting for its very survival.
-By Scott Morrison, Dow Jones Newswires; 415-765-6118; scott.morrison@ dowjones.com
(END) Dow Jones Newswires 03-19-08 1023 Copyright (c) 2008 Dow Jones & Company, Inc.
