Yahoo Flogger Slap

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affiliate2.jpgDM CONFIDENTIAL — Walking around Affiliate Summit East last week, we still couldn’t shake the two world’s colliding feel we get every time we attend the show.

In one corner sits the real affiliate world, the ecosystem supporting small to medium retailers and interest sites, the very type of program that Shawn used to manage atClubMom (now CafeMom ). These affiliates don’t socialize the same way that the other group, the arbitragers do. The arbitragers don’t create sites they care about promoting. They don’t have passions and interests, only money and opportunity. Checks of a few thousand are a rounding error to the real arbitragers.

Because both sides represent traffic on a performance basis, though, both sides congregate at Affiliate Summit. Each has decent representation on the tradeshow floor, i.e. companies looking to service and attract traffic sources, but from a dollar perspective, one half clearly dominates. And that half has been trying to figure out what to do since one of its biggest traffic suppliers, Yahoo, ceased running its offers, health and beauty continuity programs.

While it seemed like a big secret when Yahoo shut down the floggers, the process was actually very public, but unlike a traditional news story with a wide audience, this one had a narrow audience in mind – the investment community. The decision to shut down the flogs came as part of Yahoo’s Q2 2009 earnings call transcript. Every public company has these calls, where the executives describe the past quarter’s results, talk about future guidance, and answer questions from select members of the investment community. For Yahoo, this call was arguably an important one.

The company has had some serious issues of late – a seeming lack of strategy, organization, and continued market share decline in the area of internet advertising that has received the biggest boon over the past decade – paid search. Unlike Microsoft, Yahoo has finally thrown in the towel on search (outsourcing it to Microsoft), and decided to focus. That focus is very much on display, an area no one can claim domination.

So, how much does the flog world represent to Yahoo? More than you might think – $75 million of revenue on a quarterly basis. Annualized, we are talking about $300 million per year, and if we assume that Yahoo makes up as much as 50% of the market, we’re talking about a greater than half-billion dollar industry in ad spend. That could mean close to one billion in total revenue.

The question then is why would Yahoo give up so much money, especially in light of a soft ad economy and sluggish general economy? The reason, as CEO Carol Bartz said in the earnings call, has to do with the fact that “…it is no secret that many of our users are put off by a few irritating and high frequency ads that detract from their time with us.” If we over simplify the matter, it’s like the dilemma of showing ads on a paid site. If Netflix gets too aggressive in monetizing its users outside of the service, they risk some big dollars. Is it really worth an extra $1/user per year in ad revenue if you lose $100 in subscription revenue? That’s one piece of the Yahoo equation.

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We know from the number of conversions that if users mind the ads for fake blogs, they have a funny way of showing it. And, given then tens of millions of unique users that visit Yahoo, and the lack of any meaningful decline in that visitor count, that while potentially “annoying,” they can’t entirely be to blame for the decision to get rid of them. So, who is?

The real reason are the premium advertisers. Imagine being a company that just spent large amounts on CPM only to see your ad showing up in proximity (whether that is next to, before, after, etc.) a picture of a fake fat chick and her fake skinny counterpart. Then, imagine being the sales guy that has to defend the buy and try to keep charging that amount in the future. Put into CEO speak, Ms. Bartz says, “These kinds of ads don’t just frustrate users, they actually are a detriment to us, decreasing user and premium advertiser engagement and cheapening the Yahoo! brand. Dealing with these ads will be a high priority for us and it is just as important as the features we are working on to improve the content and services we offer.”

As we see in on our article covering Facebook, Yahoo is not alone in putting the user first. Granted, it’s hard to even say the statement “user first” with a straight face. Google managed to do it, but we all know that it really meant how to make the most from the users. And, that is what Yahoo, if not learning, is at least committing to.

To us, the money being turned away sounds like a lot. It is, but as was also said during the call, “It is important to put these numbers in perspective especially in contrast to the billions of advertising revenue we generate. We are confident these are the right moves to get us on the best path to better user experience and engagement and therefore growth and profit for the long-term.” Now, there will always be remnant, so there will always be opportunity. The onus is on us to reverse the trend of the ever shortening half-life for the next new thing and create the billion dollar industry that makes it a full year.

Courtesy of DM Confidential editor

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