Yahoo's Boulevard of Broken Dreams

26 December 2006

By Pete Barlas

A few years ago Yahoo (YHOO) was the company to beat in the race to bring video to the Internet.

The No. 1 Web portal acquired technology and partnerships to deliver video online. It hired a high-profile TV executive to lead an effort to develop original video content. And how many tech firms can boast Tinseltown connections so deep that its chairman's footprints are cemented in front of Hollywood's famed Grauman's Chinese Theater?

Yahoo has a lot of ground to make up before it can hope to regain the Internet's video crown.

   Google's (GOOG) deal to pay $1.65 billion for YouTube, the Web's leading video site, suddenly pushed the Web's top search service far ahead of Yahoo and others in the online video arena, analysts say.

Yahoo had the lead, says Phil Leigh, president of Inside Digital Media, a research firm.

"They really did drop the ball," he said. "They should have focused on how to be more innovative."
With 18 million visitors to its video page in October, Google ranked second among all online video providers in the U.S. The top site, YouTube, ended October with 30.3 million visitors, says market tracker Nielsen/NetRatings.

The number of consumers visiting Google Video has nearly doubled since July. Yahoo Video ranked fifth among video sites with 5.8 million visitors in October. It grew by only 527,000 visitors in six months, Nielsen/NetRatings says.

Google has been in video for less than two years vs. eight for Yahoo.

Analysts say Yahoo could have kept its lead had it launched a video-sharing site such as YouTube. Or Yahoo could have outbid Google for the service, says Rachel Honig, co-founder of Digital Power & Light, an online marketing firm.

"I think that they missed the boat," she said. "They are generally not as agile as Google."

It wasn't always so. Yahoo was the first to recognize the power of online video. In 1999, it paid $5.6 billion in stock for Broadcast.com, which was among the first to let consumers listen to radio content such as basketball games online.

Broadcast.com was starting to widen its platform to include video when Yahoo stepped in.

Yahoo's hiring of legendary Hollywood executive Terry Semel as its chief executive in 2001 seemed to confirm a shift in focus away from search and toward entertainment.

Semel spent 24 years as an executive at Warner Bros. A set of his hand and foot prints still sits in the concrete sidewalk in front of one of Hollywood's most famous landmarks, not far from those of Marilyn Monroe and Frank Sinatra.

During the early days of the Internet boom, Yahoo took the first steps to turn the personal computer into a TV. It set up a TV studio to conduct analyst interviews for its video news service, FinanceVision.

"They had cameras and everything - it was just like being in a TV studio - and they would stream these interviews over the Internet," Leigh said.

But in 2002, Yahoo shut down FinanceVision and some of its other Internet broadcast services.

One problem, analysts say, was a lack of network bandwidth. Back then, most consumers accessed the Internet with dial-up services, too slow for video viewing.

Another problem was advertising.

In those early days Yahoo couldn't justify the costs of producing and distributing the video content. The company was too far ahead of the curve, Leigh says.

"It was costly and there wasn't a big enough revenue stream from advertising to justify it, so they shut it all down," he said.

Two years ago, Yahoo took another stab at the market. It partnered with content providers such as NBC to feature free clips from hit TV shows such as "The Apprentice" on its site.

In November 2004, Yahoo hired longtime TV executive Lloyd Braun to head its media and entertainment unit. Braun had been chairman of the ABC Entertainment Television Group, a unit of Walt Disney. (DIS) He supervised the development of hit shows such as "Lost" and "Desperate Housewives."

In January 2005, Yahoo agreed to pay $100 million for a 10-year lease on more than 200,000 square feet of space in Santa Monica, Calif., for its media group, which planned to develop video programs for Yahoo.

But in March, Yahoo dropped plans to develop its own content. Instead, the company said it would build up its site with video from other publishers.

Yahoo says it will continue to offer its own video programming. One example is its war report series "Kevin Sites in the Hot Zone."

On Dec. 6, Yahoo said that Braun will leave as part of a companywide restructuring to begin in January.

Yahoo's video strategy has played out like a bad movie, says Hilmi Ozguc, chief executive of Maven Networks, which helps companies bring video online.

"They had this much-publicized investment in Santa Monica, they brought in big-shot TV executive Lloyd Braun and they were going to create original content," Ozguc said. "All of that seems to have fizzled."

Yahoo probably lost confidence in Braun when his TV successes didn't adapt well online, says Martin Pyykkonen, an analyst for Global Crown Capital.

"He didn't come up with the Internet hit," he said. "Hopefully, they can find someone who can."

Like Google Video, YouTube and others, Yahoo Video encourages consumers to watch and share amateur videos. Google and Yahoo also are scrambling to bring video from big media companies to their sites.

Google's recent partnership with Warner Music Group (WMG) will give the company a share of video ads and sales of music videos watched and sold on its site.

In the last few months Yahoo has been featuring video from ABC News, CBS-owned TV stations and Fox News in properties such as Yahoo News and Yahoo Finance.

In most cases, Yahoo shares in the sales of ads with its media partners.

By 2011, sales of video ads on the Internet will reach $1.3 billion, up from $300 million in 2005, says market research firm Jupiter Research.

Yahoo stumbled early in the video game. But it hasn't lost the race, says Greg Sterling, an analyst for Sterling Market Intelligence.

"It's too early to say that Google has won," he said. "They have clearly picked up a huge asset in YouTube, and they clearly have momentum, but Yahoo still has tricks up its corporate sleeve and shouldn't be dismissed."