How Yahoo Makes Money

Digital ads and subscription services, with more products on the way

Reviewed by Akhilesh Ganti

It’s only a slight overstatement to suggest that Yahoo was the SpaceX of the late 1990s. Back then, the concept of using a single search engine to search the internet easily and quickly 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 (GOOG), happened. It offered virtually everything Yahoo did except cheaper and faster. That condemned Yahoo to the unfortunate fate of devolving from a precocious upstart to a sluggish legacy company in a mere 18 months. It now exists as a diminished yet lucrative amalgam of disparate offerings, with everything from fantasy football and celebrity gossip to web hosting and maps. This is all packaged for the company’s real clients—its advertisers.

So how does this once-darling of the internet, which is now owned by Verizon, continue to make money? This article outlines a brief history of Yahoo and its business model.

Key Takeaways

• In the 1990s, Yahoo was one of the biggest names is tech. Then Google happened.
• Yahoo’s revenues peaked in 2008, shrinking every year thereafter.
• Verizon acquired Yahoo for about $4.5 billion in June 2017.
• Yahoo sites make up an important part of Verizon Media.

A History of Yahoo

Yahoo was founded in 1994 by Jerry Yang and David Filo. The two were graduate students at Stanford University. It began as a collection of websites and was originally called Jerry and David’s Guide to the World Wide Web. As its popularity increased, Yang and Filo changed the name to Yahoo!, which was an acronym for Yet Another Hierarchical Officious Oracle.

The company was incorporated in 1995 and made a series of acquisitions. Unlike other companies that were born during the dotcom era, Yahoo survived. The company began to quickly lose popularity and relevancy to Google beginning around the year 2000. However, its revenue did not peak until 2008. Yahoo was acquired by Verizon (VZ) for $4.83 billion in 2017.

It now operates alongside brands like HuffPost and Tumblr under the umbrella once called Oath, which was 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 led 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 (EBAY), Amazon (AMZN), and Google to China. That stake, initiated by former Yahoo chief executive officer (CEO) Marissa Mayer, kept 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. 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. Among them are:

• Yahoo Movies vs. Comcast’s Fandango
• Yahoo Weather vs. Weather.com
• Yahoo Sports vs. Walt Disney’s (DIS) ESPN.com

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 monthly active users (MAUs) 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. Ad spaces are only valuable based on the number of clicks they receive. Advertisers can choose to buy space on Yahoo sites through Verizon Media’s supply-side platform, which is more profitable for Yahoo, or on third-party demand site platforms, which is more efficient for advertisers and less profitable for Yahoo.

Verizon’s financial statements don’t differentiate Yahoo’s financial performance. But we can infer that the engagement with Yahoo sites works for Verizon, even if it’s not nearly as well as the company 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 market share 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.

2.9%

Verizon’s share of the digital advertising market.

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.

Important

Verizon Media is currently undergoing a complete overhaul. Yahoo plays a central role in this reconfiguration.

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.

Note

Verizon Media also launched a similar subscription program for Huffpost.

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. 

Important

Verizon is investing heavily in 5G. It aims to be the first company to offer 5G speeds.

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.