21-Lagging Badly Pedaling Downhill
Microsoft, at least for now, has failed in its efforts to acquire Yahoo. If it had succeeded in this acquisition, Microsoft would have had to do some radical surgery on Yahoo’s search business, and on its own as well.
Yahoo is lagging badly despite high growth. Yahoo’s revenue growth in the search business is about 19% a year. This sounds very good. In many industries that growth would be spectacular. But the overall growth in search revenues is 28% a year. Yahoo is lagging badly. Google is the overwhelming star performer. Its growth rate is 58% a year.
Yahoo performs poorly against most of its four major competitors. The four major players in the marketplace are Google, Yahoo, MSN and AOL, in that order of market share. Together they account for something less than 60% of the total market. (In the average mature market, the top four competitors own more than 80% of the total market. So this market has much maturing yet to do. All the top competitors are losing share to Google. The only top competitor to perform worse than Yahoo? Microsoft’s own MSN. The merger of these two companies is equivalent to the combination of two Division II college football teams in the hopes of beating USC.
Each of the players in the search business, other than Google, has a significant value proposition problem. Value is the combination of performance for price. If a company’s market share is falling, the inescapable fact is that the value proposition it offers is wrong. Either the price is too high or the features, reliability and convenience of the offering are too low. Or both the pricing and the performance may be low. Eventually, this lagging performance shows up in the numbers.
Yahoo’s relative numbers already show its lagging performance. Its ROE last year was 11%, but Google’s was 21%. Its trailing P/E is 34, but Google’s is 42. As the market inevitably slows, these lower returns may easily turn into losses. The antidote lies in a better value proposition. Both Yahoo and Microsoft need a lot of work.
According to Statista, at the end of 2021, Google held 86% of the worldwide search market, Microsoft’s Bing controlled 7%. Yahoo’s share was under 3%.
Verizon purchased AOL in 2015 and combined it with several assets from Yahoo in 2017. The combined company struggled. In 2018, Verizon wrote down the combined value of its purchases of AOL and Yahoo by roughly half.
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