Yahoo, AOL and Microsoft Announce Band-Aid Ad Deal, Doesn’t Change a Thing

Yahoo (NASDAQ:YHOO), AOL (NYSE:AOL) and Microsoft (NASDAQ:MSFT) have agreed to partner to sell each others’ remnant ad inventory in the hopes that this will improve the economics of the display ad business for them and in some way mitigate the momentum that Facebook and Google (NASDAQ:GOOG) have in the ad display business. The problem is that this doesn’t change the fact that Google and Facebook are simply eating the other guys’ lunch right now. This move is simply a band-aid that we expect to help out marginally in that it could lower the traffic acquisition costs (TAC) of these businesses and provide a compelling sales pitch to advertisers, but it doesn’t change the fact that the king of search and king of social are simply beating them with better products.

See our full analysis for Yahoo

Selling Excess Ad Inventory Should Reduce Costs of Selling Ads

While not all of the details are clear, we understand that this will involve selling the unused premium inventory that these companies are not able to sell themselves. Typically these ads are handed over to ad networks and not sold through their direct sales force which incurs a higher traffic acquisition costs for Yahoo, AOL and Microsoft.

If the companies are able to sell these ads themselves, there can be upside to Yahoo’s net display ad revenues, which is basically gross revenues less TAC. So we fully acknowledge that this could have a positive financial impact, it doesn’t change the underlying fundamentals of these companies’ core offerings which attract users and hence advertisers.

This Looks Like a Band-Aid for Now

While Yahoo might see some improvement in gross profits, this doesn’t change the fact that Facebook and Google are gaining greater share in the ad display market. eMarketer estimates that Facebook has around 18% of the display market share followed by Yahoo at 13% and Google at 9%. ^[1] This is why we dont think that different alliance and partnerships between the those losing market share will fix the fundamental problems. See our note on the prospective AOL-Yahoo merger in our note titled AOL-Yahoo Merger? Two Struggling Businesses Can’t Rescue Each Other.

For embattled Yahoo, we have a price estimate of $17 for Yahoo’s stock and display advertising constitutes about 15% of our price estimate.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Facebook Passes Yahoo! in Display Advertising [↩]