How Yahoo Makes Money

It's only a slight overstatement to suggest that Yahoo! Inc., founded in 1994 by Jerry Yang and David Filo, was the SpaceX of the late 1990s. Back then, the concept of using a single search engine to quickly and easily search this remarkable construct called the Internet seemed as futuristic as commercial interplanetary travel or asteroid mining do today. Throw in a free email service, instant messaging, and up-to-the-hour news feeds, and Yahoo appeared poised to become the technology company for a new century.

Then Google, now Alphabet Inc. (GOOG), happened. It offering virtually everything Yahoo did except cheaper and faster, condemning Yahoo to the unfortunate fate of devolve from precocious upstart to sluggish legacy company in a mere 18 months. Today, Yahoo exists as a diminished but still lucrative amalgam of disparate offerings — everything from fantasy football and celebrity gossip to web hosting and maps, all packaged for Yahoo's real clients, advertisers.

After its revenues began shrinking following its peak in 2007, Yahoo was acquired by Verizon (VZ) for $4.5 billion in 2017, where it now operates alongside brands like HuffPost and Tumblr under the umbrella once called "Oath" — recently retooled as "Verizon Media." Confusingly, Oath and Verizon Media both currently exist, and therefore sites like Yahoo are effectively being run by two different companies. This has lead to disorganized management.

The Business Model

Verizon's 2017 acquisition totally shook up Yahoo's business model and turned the company away from the Asian market. Yahoo's business included an equity stake in Alibaba (BABA), the astonishingly successful Chinese monolith that serves as something of a hybrid eBay Inc. (EBAY), Amazon Inc. (AMZN), and Google to China. That stake, initiated by former Yahoo CEO Marissa Mayer, had been keeping Yahoo alive through most of its digression. Verizon chose not to acquire the Alibaba stake. It also chose to exclude Yahoo Japan from the sale.

Most of Yahoo's business model was redundant in a sated marketplace, and despite Verizon Media's efforts, this may still be true. Almost every Yahoo service has a more prominent, more successful, and more easily identifiable competitor: Yahoo Movies (Comcas'’s Fandango), Yahoo Weather (Weather.com, another Comcast property), Yahoo Sports (Walt Disney Co.'s (DIS) ESPN.com), and the list goes on and on. But if you have an active Yahoo email account that you never bothered to close after switching to Gmail, or if you happen to click on a Yahoo-branded news link, congratulations. You are one of the active monthly users whom the company claims to engage. Verizon's strategy is to leverage this "engagement" for digital advertising. Verizon Media currently owns branded 23 sites, including nine Yahoo sites.

Digital Ads

Ads on Yahoo sites work like any other digital ads. Yahoo sells ad-space to advertisers. The more clicks a certain piece of ad-space garners, the more valuable it is. Advertisers can choose to buy space on Yahoo sites through Verizon Media's supply side platform (SSP), which is more profitable for Yahoo, or on third party demand site platforms (DSP), which is more efficient for advertisers and less profitable for Yahoo.

While it is difficult to determine Yahoo's financial performance from Verizon's financial statements, it does seem that "engagement" with Yahoo sites is working for Verizon, just not nearly as well as the company had hoped. According to its annual report, Verizon's media business saw a revenue increase of $1.7 billion, or 16.6% in 2018 compared to 2017. Most of this revenue increase is attributable to the influx of advertising dollars Verizon Media now collects from Yahoo sites. This makes Yahoo just barely profitable, given that Verizon Media's operating costs also rose by $1.3 billion, or 4.1%, due to its takeover of Yahoo.

Verizon's annual report also admits that its Yahoo acquisition is proving less profitable than expected, despite an unprecedented 22% rise in industry-wide revenues during the first three quarters of 2018. This is because the takeover injected even more competition into the already extremely competitive digital advertising market. Google currently dominates the market, but it is losing ground to Facebook and Amazon. As a result, Verizon's current marketshare in digital ads is currently only 2.9%, down from 3.4% in 2018.

As it stands, Yahoo, and Verizon Media broadly, are still money makers for Verizon, but just barely. Although the digital ad industry is booming in terms of volume, Verizon's decreasing market share doesn't bode well for the company's future in the space.

Future Plans

Verizon Media is undergoing significant changes in an attempt to save itself. The company is planning on launching a whopping 20 new products in the next six months. Yahoo Finance and Yahoo Mail play big roles in this strategy. The hope is to boost Yahoo's profitability by better integrating the brand with Verizon's other products and by launching subscription-based services for premium content on Yahoo's most popular site, Yahoo Finance.

Subscription Services

In June 2019, Yahoo Finance launched a subscription service called Yahoo Finance Premium that provides investors with premium content. These include premium data and charting, advanced portfolio analytics, research reports and investment ideas, and company profiles. The site also allows investors to link their pre-existing eTrade accounts to their Yahoo Finance account. Although the service has already launched, some of these features are still being fully fleshed out.

The service comes at a price of $49.99 per month.

Inbox Commerce

Yahoo has also just launched an updated version of the Yahoo Mail app, which they call a "super-app." This update centers around a new "Deals" tab in the app, which offers individualized online shopping offers to users. Verizon Media's CEO, Guru Gowrappan, calls this "enabling commerce through mail." This update will hopefully provide space for Yahoo to sell more ads inside one of its platforms. In doing this, Yahoo is betting on users who are already faithful to Yahoo. This set-up could offer some insulation from the fierce competition with Google, Facebook, and Amazon. 

Yahoo News XR Program and 5G

In November of 2017, Verizon Media launched a creative studio with immersive media company RYOT to create branded augmented reality (AR), virtual reality (VR) and 360-degree video content with corporate partners. It is perhaps Verizon's most futuristic and exciting subsidiary. In April 2019, Yahoo News, Yahoo's second most popular site, announced it would oversee a partner program between Verizon's RYOT Studio and high-profile news organizations including Reuters, the Associated Press, and TIME. Through this program, RYOT and Yahoo News will supposedly help other news outlets create AR and VR news content.

Yahoo News plans to monetize this venture by infusing news content with the VR- and AR-branded content — read: ads — that RYOT has experience making. RYOT will also offer partners access to its software development kit, which makes the creation of VR and AR content more cost effective.

This studio also serves a flashy, modern project that integrates Verizon's upcoming launch of its 5G network. This network will be integrated into all of Verizon Media's products to raise their speeds. The RYOT studio is designed to show off what such speeds can do, and to encourage users to consume the studio's data-intensive content using Verizon devices and apps. 

Staff Cuts

Like all digital media companies, Verizon Media and Yahoo are currently doing all they can to weather growing instability in the industry. Earlier this year, Verizon Media cut 7% of its workforce.

Key Challenges

As already outlined above, Yahoo and Verizon Media are facing a lot of challenges. Here's a recap.

• The organizational messiness caused by the simultaneous existence of Oath and Verizon Media have made it difficult for brands like Yahoo to respond to the challenging business environment of digital media.
• Yahoo's brand pales in comparison to other companies that offer virtually the same products. It is hard to imagine a world in which Yahoo manages to compete with the likes of Google, Facebook, and Comcast much longer.
• Verizon Media has struggled to hold on to the small market share it had in digital ads a few years ago, and unless its new products catch on, it's likely to lose more.