Yahoo Still Searching for Winning Strategy

Yahoo’s revenue drops but its Alibaba stock gives it cash to fund ‘next big thing.’

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Yahoo CEO Marissa Mayer says she's pleased the website's monthly user traffic is up 20 percent over the past 15 months.

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Yahoo is having a busy year trying to recapture its faded prestige as a technology giant, but its new acquisitions, hiring and the much-hyped revamping of its website aren’t giving the company the comeback picture it needs.

Yahoo’s third quarter report on Tuesday shows the company’s revenue dropped compared with last year, reporting $1.081 billion in net revenue, excluding fees paid to third-party websites, in the three month period ending Sept. 30, compared with $1.089 billion the same period last year.

The Web portal has acquired more than a dozen tech companies and startups since appointing Marissa Mayer as CEO of Yahoo in July 2012, including the purchase of photo sharing website Tumblr in May. The company revealed on Tuesday that it acquired eight companies in the third quarter alone. During its third quarter the company has also launched new products including My Yahoo, a new personalized Web and mobile desktop experience, and Yahoo Screen, which features video partnerships with Viacom and NBC.

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"I'm very pleased with our execution, especially as we've continued to invest in and strengthen our core business," Mayer said. "Now with more than 800 million monthly users on Yahoo, up 20 percent over the past 15 months, we're achieving meaningful increases in user engagement and traffic."

But for all Mayer’s work, the company has not shown that it can innovate the “the next big thing,” and will likely be a weak investment for the near future, says Brian Wieser, tech market analyst at the Pivotal Research Group. Much of Yahoo’s money still comes from display ads, and while the company has made progress improving search engine features it has not developed major ways to attract advertisers on its products, Wieser says.

“Advertisers increasingly buy audiences instead of media properties,” Wieser says. “To be optimistic about Yahoo you have to have a view that its acquisitions will help them establish new revenue streams. There is nothing they have done so far that indicates that can turn around their advertising business.”

The saving grace for Yahoo is its wise investment in e-commerce website Alibaba, which dates back to 2005, Wieser says. Yahoo owns a 24 percent stake in China-based Alibaba, which allows manufacturers and consumers to buy and sell anything using its global online marketplace. Alibaba is poised to become a publicly-traded company in 2014 and is valued at $120 billion by analyst firm Evercore Partners, and at $110 billion by PrivCo analyst firm. To put that in context, Facebook reached a $104 billion valuation after its initial public offering in 2012. Yahoo also reported on Tuesday that Alibaba’s revenue is booming, increasing by 60 percent to $1.73 billion in that company’s second quarter.

Mayer also announced a deal by which her company will be required to sell fewer shares of Alibaba during that company’s initial public offering, so Yahoo will be able to hang on to some valuable stock.

Yahoo has a payday coming but needs to spend it wisely, perhaps by making acquisitions that “tell a story” and point towards a solid direction for the company, says Allen Weiner, a vice president of research at Gartner technology analysis firm.

“The Tumblr acquisition could become a great content platform for Yahoo to work with third parties, but I have not seen that yet,” Weiner says. “Yahoo was among the first to have an online video vision with Yahoo Screen, but I have not seen anything that leads us to believe that they have become a leader or a thought visionary in that. They need more content.”

Yahoo also announced that its tally of monthly active mobile users jumped to 390 million during the third quarter, up from approximately 300 million monthly active mobile user mark in the first quarter of this year. Much of the social networking industry is moving onto mobile devices, and that advertising market might grow, but for now Yahoo’s mobile strategy is unclear, Weiner says.

“The only that we know for sure about Yahoo’s mobile strategy is that it does not include a device, the way Microsoft has a device and the way Google has a device,” Weiner says, alluding to the Google Android operating system and the Microsoft Windows phone.