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Online advertising growth adds to Yahoo's profit

Posted by inet - 2005-10-19

Yahoo's dominance in the online advertising industry continued to pay dividends as the Sunnyvale company Tuesday reported third-quarter earnings that beat the expectations of Wall Street analysts.
Yahoo said it earned $253.8 million, or 17 cents a share, for the three months that ended in September. That's about the same as the $253.3 million, or 17 cents a share, it earned in the same period a year ago. But the 2004 numbers were unusually inflated because Yahoo sold off part of a large investment in competitor Google.

Analysts were expecting profit of 14 cents a share for the third quarter of 2005, according to a survey by Thomson Financial.

Sales jumped 47 percent from a year ago, hitting $1.33 billion. Excluding the commissions Yahoo paid to business partners that carry its ads, its third-quarter revenue was $932 million.

David Hallerman, a senior analyst for New York research firm eMarketer, compared Yahoo's dominance to that of a star baseball pitcher. He said he is amazed at Yahoo's consistently strong growth.

``It's like winning 20 games one year, 21 games the next, 20 games the year after that,'' Hallerman said.

The online advertising market continues to grow rapidly, while consolidating into an industry dominated by two Silicon Valley giants -- Yahoo and Google. Of the $12.9 billion in online ad spending expected this year, about half will go to the two companies, according to eMarketer.

To date, Google's success has come mostly from placing text ads alongside Internet search results and throughout a vast network of Web publishers.

Yahoo's ad strategy is more diversified, including graphical banner ads splashed across its hundreds of Web pages, video ads and text ads alongside search results.

The growing demand for ``brand'' advertising -- typically graphical ads that marketers use to build awareness of a product or company -- has been especially beneficial for Yahoo, as companies shift marketing dollars online from traditional media such as newspapers, magazines and radio.

While other media have struggled to keep advertisers from defecting, Yahoo was able to raise its rates for graphical display ads as much as 5 percent in the third quarter, according to an Oct. 10 report by JPMorgan analyst Imran Khan.

The number of video ads, for example, though still a small segment of overall ad offerings, doubled over the past year, Yahoo executives said Tuesday on a conference call with analysts.

Reflecting the evolving advertising landscape, Yahoo said it is combining its Internet-search and branded advertising divisions under one roof. The move is a response to the fact that advertisers, particularly large companies, are increasingly using both forms of advertising to reach potential customers, said Yahoo Chief Executive Terry Semel.

``We believe the future is about closer alignment of these two groups,'' he said.

A smaller revenue stream for Yahoo, meanwhile, are the fees people pay to use some of its services, such as fantasy sports, small-business Web-site hosting and e-mail, Yahoo Personals or the premium version of Yahoo Mail. There, too, the company is growing, adding 1.3 million paid subscribers since the second quarter. At the end of the third quarter, Yahoo had 11.4 million subscribers who contributed revenue of $170 million.

All is not perfect in Yahoo's world, however.

Yahoo is losing a key advertising partner, Microsoft, in 2006. Microsoft's Internet division has launched its own search engine and begun rolling out its own ad network.

Also, Yahoo's share of the search-engine market appears to be slipping. In August, its share stood at 29.7 percent, a dip from 30.6 percent in the prior year, according to comScore Media Metrix, the Internet-audience-measurement division of Reston, Va.-based comScore Networks.

Google, on the other hand, increased its lead to a 37.3 percent share, up from 36.1 percent.

Mountain View-based Google is scheduled to report its earnings Thursday.

Semel declined to answer a question about reports that Yahoo is in discussions to acquire a stake in competitor AOL. Microsoft, Google and Comcast are also reportedly in talks with parent company Time Warner about buying a portion of AOL.

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