The last 2 days have been filled with talk about Yahoo, and why it is losing the race against google. I have what I think is the defacto reason. Period. No questions. Only answer. Ever. It all comes down to ad dollars. Let’s start with a bit of history first.

Yahoo started in this ad game in the mid 90s, before there was a critical mass on the internet as far as consumers and corporations. So Y! started by targeting the large ad buys on their properties. It only made sense to do it this way from Y! perspective, as they had the largest inventory, and didn’t have any other reasonable way of selling that inventory in a cost effective manner. So Yahoo focused on doing a couple hundred or thousand really big ad buys every year for big brand advertisers, Coke, Toyota, Nike, etc. These brand advertisers sustained the Y! bottom line quite well for years. Essentially Yahoo built itself a non-scalable sales channel, as every big name customer required a large amount of resources to support.

Conversely Google looked at the long tail approach, and realized that with such a massively varied inventory of pages to sell ads on they couldn’t do the same model of ads. They HAD to move towards a self-serve system, it was the only logical way. So with that in mind google went after the 5 Million small businesses and the long tail of advertising and hasn’t looked back since. It is much easier to sell 1 million ads at $5 a piece than 5 ads at $1 million a piece. By keeping the barrier to entry so low ($50), google has made it affordable and not risky for a small business unfamiliar with the web to try it out.

So fast forward to now, Yahoo has spent a lot of money on revamping their self-serve tools with Panama, but they have failed to expand their inventory. They could have done this by targeting publishers through their Adsense competitor ( but so far its limited in size, and very few sites support it or have been invited to join). Adsense contributed over $1.6B to Google’s bottomline in the last quarter, half that business and Yahoo could have been sitting in a different position right now.

So ultimately its up to Yahoo to step up their game. They aren’t down and out yet, they just need to realize what their assets are, and open them up. Once they improve their sales channel, and make it less dependent on brand advertisers, they can better monetize their search and their pages. Yahoo’s Achilles heel right now is its non-scalable ad sales channel. Remember, Yahoo still commands a huge % of internet traffic and is still a top-5 web destination.
I’ll be posting more on Y! in the coming days.

Disclosure: I own a limited amount of Y! stock.