Yahoo's earnings provide another excellent window into why the DOJ has serious antitrust concerns with the proposed ad partnership between Google and Yahoo.
- Yahoo's discussion of its 4Q08 earnings provides the DOJ with substantial fresh evidence that Yahoo continues to lose revenue and profit share to Google.
- Moreover, Yahoo's earnings report showed Yahoo was clearly caught off guard that the Google-Yahoo ad agreement did not get cleared by DOJ, as evidenced by the big whipsaw in Yahoo's headcount plans.
I. Evidence Yahoo is losing revenue/profit share to Google:
While Yahoo tried to put the best face on Yahoo's search business growth, in the comparisons that matter to the DOJ, Yahoo slid much further behind Google.
From 3Q07 to 3Q08, Yahoo grew overall revenues by $.018b or 1%, and search revenues $.063b or 17%, while Google grew search revenues $1.310b or 31%.
- In other words, in the last year, Google grew 20 times more revenue than Yahoo in absolute terms.
In 3Q08, Yahoo's operating income was $.070b, a decrease of 53% from 3Q07, while Google's operating income was $1.743b, an increase of 32% from 3Q07.
- What this means is that Google's percent of U.S. Internet advertising profits has risen from an estimated ~90% in 2Q08, to an estimated ~95% of the market in 3Q08, assuming that other U.S. Internet advertising competitors, Microsoft, AOL, and Ask.com continue to be unprofitable in this worsening environment as they have long been.
- In other words, in addition to dominating over 95% of U.S. Internet advertising profits, Google is the only significant U.S. Internet advertising competitor that is increasing its profitability, which is further powerful evidence of Google's increasing market power.
II. Evidence Yahoo was caught off guard:
Probably the most compelling evidence that Yahoo was caught off guard that the DOJ would have serious problems with the Google-Yahoo ad partnership, is the stunning whipsaw in Yahoo's headcount.
- Per page 11 of Yahoo's earnings slides, Yahoo reported that its 3Q08 ending employee count was 15,200, which was up a surprising 900 employees or 6% from the previous 2Q08 count of 14,300.
- This apparent optimistic hiring ramp-up, in face of a slowing Internet advertising economy throughout the year per IAB figures, strongly suggests that Yahoo was banking on the revenue and cash flow infusion of the Google-Yahoo ad partnership, which Yahoo originally expected to be approved September 25th and to add $800m in revenues to Yahoo on an annualized basis.
- Yahoo announced today it would completely reverse course and would reduce Yahoo's headcount by 10% or around 1500 employees, which is 600 more employees reduced than the amount that Yahoo just added in the last 3 months.
- This is a substantial whipsaw for Google's operations and culture.
- Either Yahoo was surprised the Google deal did not get approved or Yahoo is seeing a much steeper revenue decline due to the aftermath of the global financial crisis than they are letting on.
Bottom line:
Yahoo's earnings provide additional powerful evidence of Google's increasing dominance of the Internet advertising marketplace.
They also underscore how dependent Yahoo would be on the Google ad partnership -- to maintain revenue growth and headcount stability.
