Can Yahoo! Maintain Its Competitive Edge?

Strategic Management BA 4305-002

March 29, 2007

Can Yahoo! Maintain its Competitive Edge?

Yahoo! is one of the oldest and most well-known Internet content providers. Yahoo! offers one of the most diverse Internet websites and CEO Terry S. Semel has a goal of making Yahoo! into an Internet theme park, or a "digital Disneyland" (Shamsie 795). Semel believes that by expanding Yahoo!'s services and expanding broadband access, Yahoo! customers will stay on Yahoo!'s website and spend increasing amounts of time and money (795). Yahoo!'s biggest obstacle lies in its competition in the form of Google, AOL, and MSN. Google has dominated the search market which is a large portion of the revenue for an Internet provider. Yahoo! has diversified its services to offset the losses in the market for search engines and the accompanying advertising revenue. Yahoo!'s greatest challenges are to expand its market share and continue delivering returns to its shareholders.

General Environment of the Industry

The majority of customers in the Internet provider industry are young, technologically savvy customers that use the vast majority of the Internet. There is also a large growth market outside the United States, where many developing countries are rising in affluence and large populations of people are learning of the Internet experience for the first time.

Products in the Internet provider industry are very technologically advanced. The industry uses the latest and greatest technologies to gain and maintain its customer base as well as its advertising clients.

The advent of the Internet created a new arena for illegal activity as well as new problems with First Amendment considerations. Congress has responded to concerns from constituents regarding spam, Internet pornography, and the concerns of the music and movie industry regarding copyright infringement by attempting to pass laws to limit their effect. Congress passed the Digital Millennium Copyright Act of 1998 to stop copyright infringement. The Child Online Protection Act of 1998, Children's Internet Protection Act, and the Dot Kids Implementation and Efficiency Act were passed to protect children from Internet pornographers and child predators. The Can-Spam Act of 2003 was passed to curb the amount and type of spam people received. The Truth in Domain Names Act was passed to prevent an entity from using a misleading name and deceiving a person into viewing obscene material (Isenberg). Though Congress has attempted to deal with pornographic websites by passing COPA, CIPA, and the Dot Kids Implementation and Efficiency Act, the judicial branch in March of 2007, ruled that COPA, violates the constitutional rights of adults (McCullagh). There are many other issues that Congress will eventually have to review such as file-sharing, patents, taxes, phone calls over the Internet, known as VoIP or Voice over Internet Protocol (Isenberg).

Economic factors which affect Internet service providers are the same as those affecting any other company doing business. An economic downturn can reduce the number of people using the premium services of Internet providers. Advertisers could spend less in a period of low economic growth. The stock market has a large effect on the Internet provider industry. There is speculation that there may be another mini-Internet bubble, and that when the bubble bursts, the industry will once again be plagued by low stock prices and devaluation (Shamsie 792).

By its nature, Internet providers have access to customers globally. The Internet makes it easier to reach customers all over the world. Anyone in the world that has a computer and free access to the Internet can access provider content. Most Internet providers have websites tailored to each specific country. However, in most countries, content from other countries is also available by selecting a country from a list. This makes the content more relevant to the user. More than any other single factor, the Internet has increased the rate of globalization (Dess, Lumpkin, Eisner 25)

Porter's Five Forces

Threat of new entrants into the Internet provider industry is medium. There are strong brands in the industry fighting for market share creating difficulties for new entrants. However, as exhibited by Google, there is always room for another provider. The cost to begin a website on the Internet is relatively high due to the technological equipment requirements such as servers and the expense of skilled labor. Technology advancements have made servers more efficient and able to perform more work at one time. An aspiring company can start small and simply increase its offering as web traffic increases. The next step would be to go public in order to increase cash for expansion. The profits made my companies such as Google and Yahoo! are attractive to new entrants.

Bargaining power of buyers and suppliers is low. It is very difficult for either group to collude to drive prices up or down. Buyers are individual consumers that are not able to integrate or concentrate their power. Suppliers are in a fiercely competitive market and are vying for Yahoo!'s business. Red Hat and Oracle have been fighting publicly for Yahoo!'s business, with Oracle announcing that it has replaced Red Hat as Yahoo!'s Linux support supplier in 2007 despite Yahoo!'s comments that they are still using Red Hat in addition to Oracle (Red Hat).

The threat of substitute products and services is low. The Internet has become an indispensable tool for many. The alternatives for finding phone numbers and locations are phone books and dialing information, both of which take longer and produce less relevant results than Internet search engines. Television also offers alternatives in the way of news channels. However, this medium has been losing viewers for years. Much of the content that is on television is available on the Internet in a searchable format. People have become used to pointing, clicking, and having instant gratification in the form of watching or reading a news story. Having to wait for a show to run a segment on the news is unnecessary. There are other websites that are constantly vying for the same traffic as Yahoo! and these are Yahoo!'s real competitors.

The intensity of rivalry among competitors is very high in the Internet provider industry. In the search industry, Google has dominated globally every year with market share at 60% in January of 2006, while Yahoo!'s share was at 19%. In November of 2004, Google held 47% of the market share in global searches while Yahoo! held 27%. Yahoo!'s