What do Yahoo's monetization woes have to do with social networking sites?

Yahoo's woes
Here's an interesting excerpt from a recent NYT article on Yahoo's troubles: Yahoo’s Vision-Goes-Here Strategy.

... Mr. Yang and Ms. Decker’s strategy is essentially “vision goes here.” They want to be the “starting point” for users on the Web. They want to be the “must buy” for advertisers. And Mr. Yang said he would assume an “aggressive investment posture.”

The only thing missing from that is the substance. Why would users start at Yahoo? How are advertisers going to find Yahoo superior? And what will the company invest in?

The fascinating part is that Yahoo absolutely *is* the starting point for many users on the web, particularly when it comes to e-mail, IM, and news.

The problem is bridging the gap between two "modes" of user behavior:

Communication:

• e-mailing
• IM
• news
• entertainment
• etc.

to:

• search
• shopping
• reference

... the latter which are better for monetization, because ultimately it combines motivation and intent with sending traffic off of the site.

Sound familiar?
Of course, this problem exists not just within Yahoo, but for any company that focuses on a high-traffic, high-growth area which has poor monetization.

This includes companies like:

• Hotmail
• Geocities
• MySpace
• Skype
• Facebook
• etc.

All of these companies ended up with big valuations, but never made the jump to monetizing the way Google's able to. In Yahoo's case, this is particularly depressing because the core of the company was always a place to jump off to other sites via a directory - but now it's a communications hub.

I think the woes of Yahoo are one in a long string of companies that have had huge traffic, but the wrong KIND of traffic. Question is, who will figure out how to cross this gap? This is probably the single most important monetization issue facing the social networking and UGC industry.

Comments

[dave mcclure]

yep, very clear summary of the issues.

surprising that so many other folks don't get this.

one other point to consider: for social networks, it's possible that you can offset the inherently-lower value behavior of a social network user (who tends to be in "passive browse / entertainment mode", relative to that of a search user who tends to be in "seek / purchase mode"), based on the ability of a social network to amplify signal and create viral memes.

examples:
* a Google user exhibits targeted behavior that monetizes @ $X
* a Facebook user exhibits social behavior that monetizes poorly @ $.1X, but also amplifies signal to 10 other users, who in the aggregate monetize @ 10 * $.1X = $X

in other words, Facebook "makes it up in volume"...

;)

[Bob Warfield]

All true. Context is king, and Google has made this work to their favor. But there is another company right in Microsoft's backyard that could have made a hugely better acquisition target.

They have the context, and they are strategic in terms of where the world is going. They are a sleeping giant. If Google winds up buying them as a counter to Yahoo, it will have been a hugely better purchase.

More on my blog:

http://smoothspan.wordpress.com/2008/02/04/microsoft-yahoo-the-only-counter-google-combination-that-makes-sense-the-force-is-strong-in-another-one/

Best,

BW