Is Yahoo the Right Fit?

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By: Mark Fitzgerald and Jennifer Saba

Wall Street calls Microsoft’s generously priced but unwelcome bid for Yahoo Inc. a “bear hug” ? but will it be newspapers who get squeezed? Some of the newspaper industry’s new-media gurus think so. No matter who wins, they say, the fight will distract Yahoo at a crucial time in the rollout of its next-generation online ad tools for the 600-plus papers in the newspaper consortium.

While the additional ad revenue Yahoo brings is clearly important to consortium newspapers, they’re about to find out how important

newspapers are to Yahoo, these critics warn.

“I’m just saying that it’s a big company with lots of things going on,” says San Francisco-based consultant Alan Mutter. “The newspaper initiative is just one of many ? and not one of the leading lines of business.”

CEOs in the newspaper consortium say that kind of talk doesn’t reflect the reality of Yahoo’s efforts. “Yahoo has 572 people working full time on newspaper consortium projects, and we were told that number could exceed 700 in the next few months,” says MediaNews Group CEO William Dean Singleton, interviewed just hours after a two-day meeting of consortium heads at Yahoo’s Sunnyvale, Calif., headquarters. “They are giving it a very determined focus.” The alliance keeps growing too. In late February, Yahoo said that four publishers including Shaw Newspapers and The Buffalo (N.Y.) News joined the group.

If the Microsoft bid is disrupting any work ? and that’s a big if ? it’s happening in Yahoo’s executive suites, not at the desktops of programmers, adds Gregory P. Schermer, Lee Enterprises’ vice president/ interactive media, who was also at the Sunnyvale meeting held in early February.

Certainly, any distractions only mounted after Microsoft’s surprise announcement of its $44.6 billion, $31-per-share takeover bid, a 60% premium on Yahoo’s stock price when the offer was made public on Feb. 1. Google made noises about holding up any deal for regulatory reasons. Rupert Murdoch’s News Corp. rushed to Yahoo’s side, offering to fold the social networking site MySpace.com into the portal, and inject the company with $15 billion in cash. News Corp. would in turn become Yahoo’s biggest single shareholder, with a 20% stake.

Microsoft’s Murdochian move to make such a sweet offer ? almost the exact same premium News Corp. put on the table with the Bancroft family at Dow Jones ? makes deflecting the bid difficult. But Yahoo has done just that ? and now Microsoft is preparing for a proxy battle.

As if the ownership situation weren’t complicated enough for newspapers, remember that Microsoft owns a 4% stake in CareerBuilder, the large recruitment network built by Gannett Co., Tribune Co., and The McClatchy Co.

Cox Newspapers President Jay Smith harbored some nagging feelings about the alliance because of the extreme challenges facing newspapers and now the immediate hurdle Yahoo has to surmount. But when he reached Sunnyvale on Feb. 7, those fears were allayed. Smith was impressed by the level of commitment from Yahoo’s top executives, including Executive VP Hilary Schneider and President Sue Decker ? both of whom attended the meetings and a Thursday night dinner at the Four Seasons.

“I don’t spend a lot of time worrying about things beyond my control,” Smith says about Yahoo’s predicament. “Whatever the outcome, I’m an optimist. The premise behind our relationship with Yahoo is such that it will last.”

Singleton, for one, says he’s agnostic about Yahoo’s ownership: “My view is that it’s up to Yahoo to decide whether they are going to be bought by Microsoft or not, and we’re supportive if they decide to be bought, and we’re supportive if they decide not to be bought.”

It won’t matter who wins, he argues, noting that immediately after the announcement, Microsoft executives reached out to consortium members to assure them the colossus of Redmond, Wash., is “very supportive of the newspaper projects.”

But Microsoft and the newspaper industry have a history. “It’s been hard to walk away from Microsoft meetings without the sense your pocket has just been picked, or its hand is still in it as you depart town,” Ken Doctor, the former vice president of Knight Ridder Digital, wrote Feb. 3 on his blog, “Content Bridges.” Microsoft once tried to muscle in on newspapers’ local franchises with events-listings sites branded “Sidewalk.” Newspapers beat back that challenge, but CEO Steve Ballmer has mused recently that maybe Microsoft walked away too soon from the concept.

At a minimum, Microsoft ownership could bring uncertainties, warns Tapit Partners managing partner Mutter: “In the worst-case scenario, what if Microsoft decides it doesn’t want to help newspapers anymore? What if they go 12 months down the line, and say, ‘We don’t want to do anything with you anymore?'”



Prepare to be ‘blown away’

The Yahoo newspaper consortium was formed in November of 2006 with seven newspaper chains representing 150 dailies, and has since quickly grown. Right now, more than 400 dailies ? approximately one-third of all dailies in the U.S. ? are partnering with Yahoo.

The idea is that newspapers would join their deep local knowledge with Yahoo’s national online platform. Yahoo’s first project was to combine its HotJobs help-wanted site with local sites.

So far, newspapers have liked what they’ve gotten.

“Our Yahoo partnership has been hugely successful for Lee,” says Schermer. “Beginning with HotJobs, we’ve driven significant revenue growth to the point where in the last fiscal year we had combined print and online [advertising revenue] growth of 6.1%. We were positive, not falling. So we have a lot of confidence that this model combining national and local has a huge upside for Yahoo and the newspaper business.”

In the next few months, newspapers will begin beta testing of a platform that moves beyond the troubled recruitment advertising arena ? and from traditional mass aggregation of eyeballs into targeting by demographics, geography, and consumer behavior. None of the CEOs will describe in any detail what Yahoo has cooking, but they are uniformly impressed.

McClatchy, for one, is staking future revenue gains on online prospects. During a quarterly earnings call in February, CEO and Chairman Gary Pruitt signaled he expected to see strong double-digit online growth, thanks in part to Yahoo’s ad platform and traffic generation, throughout what will sure to prove an otherwise painful 2008.

One attendee, who requested anonymity, told E&P, “If you had seen what I saw, you would be blown away, absolutely blown away.”

Cox’s Smith echoed that excitement: “I was blown away by the intensity and the commitment they are making to the partnership. They have several hundred engineers dedicated to working on this full time. I did the math in my head ? calculating the commitment that Yahoo is making is in the tens of millions of dollars. That caught my eye,” he happily adds.

Critics note that Yahoo is late on some of these key deliverables, but the consortium leaders are unfazed. “The platform is a little behind schedule, but not a lot,” says Singleton.

Speed is no problem for Yahoo, argues Schermer: “They’ve been fast. They’ve been highly cooperative. They’ve had amazing attention to detail, and speed-to-market. They are exceptionally disciplined in their approach to execution.”

More important, he adds, is that newspapers share strategic goals with Yahoo, whose every move is intended to make it the first stop on the Web.

Yahoo’s vice president of the newspaper consortium Lem Lloyd waves away the notion that Yahoo staffers are distracted by the Microsoft bid. “Our main message to them last week is we are more committed to the partnership,” he says of the CEO meeting. “Hopefully, they got that loud and clear.”

The ad platform is set to roll out later this year, he continues, and Yahoo executives had accelerated other key obligations including expanding the ability for newspapers to sell Yahoo inventory.

“I think that it’s important to understand that in Yahoo’s strategic vision, we are at the epicenter of their key strategies,” says Schermer. “I’m not saying newspapers will dictate Yahoo’s success. I’m just saying we are completely aligned in a vision.”

In fact, he adds, Yahoo is so reliable that he describes it as “a very mature Internet company ? and I mean that in a positive way.”



Keeping things in perspective

“Mature,” though, remains a kind of insult in any new-media context ? and some Silicon Valley bloggers have dismissed Yahoo as the last of the “old” media. Mutter, for instance, says HotJobs is no different from the century-old business model for newspaper classified sections: build an audience as big as possible, and put as many ads as possible in front of it.

“HotJobs and CareerBuilder are the online direct descendants of print, but that’s not how most employers are recruiting anymore,” Mutter says. The future, he adds, is in sites like GasWork.com, where anesthesiologists go to look for work: “You wouldn’t go there, and I wouldn’t go there. But if you’re an anesthesiologist, that’s where you’d go.”

Newspapers should partner up with those kinds of niche players in addition to Yahoo, he suggests.

But for all the valentines going back and forth between newspapers and Yahoo, maybe newspapers should think more about an open relationship, suggests Content Bridges’ Doctor. “I think their strategy embracing Yahoo was right. The problem is it shouldn’t be the strategy,” he says. “Let’s not just look for a Yahoo bump in revenue or a Google bump, let’s look for a ‘www’ bump and embrace the Web for what it is. Let’s do a lot with Yahoo, but let’s not invest the future of the American newspaper industry with one company. That has been the flaw.”

Doctor, who is an affiliate analyst with Outsell Research, gives props to newspapers for coming together, especially given the failed New Century Network, but thinks the industry will be better served if it moves as a group on other technology-related issues. “Look how we talk about it ? the ‘Yahoo newspaper consortium.’ It should be the ‘newspaper consortium.'”



Who’s opting out, and why

Still, there are gaping holes ? or as Cox Newspapers Smith describes it, “glaring omissions” of two giants ? Tribune and Gannett ? that have opted not to join Yahoo. For months rumors flew that both companies flirted with the prospect of starting a competing network, rumors that bore out on Feb. 15 when Gannett and Tribune (as well as Hearst and The New York Times Co.), announced their own national online ad network, quadrantOne.

Jack Williams, president of Gannett’s digital ventures and speaking on behalf of quadrantOne, is hopeful that more newspapers will join up. “Our Web sites are typically the strongest in our local communities, and we have been unsuccessful in tapping national ad dollars spent on the Internet. We want to work together to go after those dollars.”

QuadrantOne has a dedicated sales staff armed with committed inventory from each paper, though Williams could not say how many salespeople will be involved. The venture then takes a commission (Williams also would not disclose the revenue split among the founding companies). He suspects there will be very little overlap between the newspaper local sales team and quadrantOne, since national advertisers want to buy ad space in one swoop rather than make online buys paper by paper.

Williams sees no reason why newspapers can’t be involved in both Yahoo and quadrantOne. Hearst, for instance, is a founding partner in the Yahoo alliance. Williams says Gannett has spent a lot of time talking to Yahoo, but when the deal was initially formed it didn’t make sense for the McLean, Va., company. “It doesn’t mean we won’t work with them later,” he adds.

Tribune could possibly join the ranks of the Yahoo partnership, given the overlap of new board member Maggie Wilderotter ? the former senior vice president of the worldwide public sector at Microsoft also sits on the board of Yahoo.

But the newspaper CEOs say what Yahoo is about to roll out will be exactly the kind of rules-changing technology that will go a long way to monetizing online at the same levels as print advertising. “They not only took the 64-page RFP (request for proposal) we gave them, they blew everybody away with the way they exceeded the expectations of publishers,” Lee’s Schermer says. “This is pretty impressive stuff that we think will give us the ability to drive price up, because we can deliver a more valuable audience with this new technology.”

The Microsoft bid and all its complicated consequences aren’t dimming the newspaper consortium’s enthusiasm, adds Singleton: “The CEO members just left [Yahoo] today after two days of discussions and reviews of what’s going on ? and I would say we are very, very psyched.”

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