Why Yahoo! Gets 4 Cents Per Search, While Google Gets 11 Cents

IN mid-October, Yahoo, the world's biggest Internet portal, reported a sharp profit skid and warned of a further growth slowdown in two major lines of business — a performance that its unusually contrite chief executive said had failed to fully exploit the company's strengths.

That was enough for Scott W. Devitt, an analyst based in Manassas, Va., who covers Yahoo for Stifel, Nicolaus & Company, the investment banking firm. Three days later, Mr. Devitt downgraded Yahoo shares — which at the turn of the century traded above $100 and were then about $23 — to a hold from a buy. Fidelity Investments has also soured on the stock, but declined to say why it sold 55.6 million Yahoo shares between midyear and Oct. 31.

But Justin Post, a Merrill Lynch analyst in San Francisco, had the opposite reaction to the grim news from Yahoo. Just before Halloween, Mr. Post, noting the stock's sharp drop this year, saw "an attractive entry point" and raised his appraisal to buy from neutral.

So is Yahoo stock, which now trades at $26.91, down 31.3 percent this year, a bargain suitable for value investors? Or is the once highflying company — which in its heyday was regarded not unlike today's Google — destined to bring further disappointment?

Despite contrasting opinions, analysts and stockholders of Yahoo generally agree on what ails it. And there is a consensus that if it remained an underachiever, it would be a candidate for takeover.

The main problem is that Yahoo has not been nearly as good as Google at reaping profits from the huge volume of search traffic it attracts. Yahoo's search revenue in the third quarter was $191 million, versus $911 million for Google, Mr. Post's report estimated.

"Yahoo touches one out of every two people on the Internet every month, which is unparalleled reach," said Randy Befumo, co-director of research at Legg Mason, which holds some 40 million Yahoo shares in various accounts, including funds run by Bill Miller, Legg Mason's marquee mutual fund manager. Despite the fact that Yahoo actually has more traffic than Google," Mr. Befumo said, Google has more revenue. "So there definitely is a problem with Yahoo's monetization."

According to Mr. Post, who also points to this issue, each domestic search generates about 4 cents for Yahoo, compared with 11 cents a search at Google.

Some analysts see other sources of concern — questions that the market may not have recognized as fully as the lag in converting search traffic to cash. Prominent among these is the strength of challenges to Yahoo's commanding position in the branded business of display advertising on the Web. Mr. Devitt calls this issue "the new surprise."

He points to more aggressive investment by Microsoft in MSN.com, its Internet portal; AOL unbundling its business and making it available free; and the rapid emergence of fresh competition from social networking sites like MySpace, Facebook and YouTube.

"That, as well as the traditional media moving on the Internet, has significantly increased the inventory for display advertising alternatives," Mr. Devitt said. "It's impacted the pricing pressure and the dominance that Yahoo had in that business."

Mr. Post of Merrill Lynch acknowledges the drag on Yahoo's business. The industry's growth rate is catching up with Yahoo's in this area, he said. "When someone's growth rate is declining, it's hard to know where the bottom is," Mr. Post said. Still, he said, Wall Street's worries about this seem overdone, creating a buying opportunity at the beginning of a traditionally strong holiday period for the Internet.

Then there is the problem of eroding revenue from Web sites that are increasingly choosing to link to Google, which can provide better monetization of traffic. "This is something that puts at risk Yahoo's network business longer-term," Mr. Devitt said.

Yahoo management, led by its chief executive, Terry S. Semel, is counting heavily on a technological upgrade of its search engine to enhance profits. The delayed upgrade, called Project Panama, is now scheduled for introduction in 2007, and analysts expect it to narrow Yahoo's search gap with Google. Merrill Lynch figures that the project will raise revenue per search to around 5 cents in 2008, or as much as 7 cents if Panama proves a rousing success.

"Monetization is a hard thing; not too many people do it very well," said Mr. Befumo at Legg Mason. But, he contended, Yahoo has some appealing alternatives.

"If you have a traffic problem, then you have a fundamental business problem because you have nothing to convert into revenue dollars," he said. "But if you have a monetization problem, which is what Yahoo effectively has, you always have options."

If Project Panama falls short, Mr. Befumo said, Yahoo could have Google or Microsoft do Web-searching for it in return for perhaps 5 or 10 percent of the revenue. "You could solve the monetization problem overnight" with such a contract, he said.

Yahoo shares, which have climbed about 11 percent in the past month, have been supported by company buybacks — over $1 billion worth in the third quarter, more than triple the purchases in the second quarter — and by what appears to be increased speculation that the company is a possible target for acquisition, perhaps in a private-equity deal or a leveraged buyout. Yahoo could also buy another company, and Facebook has been mentioned as a possibility.

A spokeswoman for Yahoo said it did not comment on such speculation.

In his report upgrading the shares, Mr. Post wrote that "we think Yahoo's assets would be compelling for Microsoft or a large media conglomerate looking to build a meaningful online presence." He set a 12-month price goal of $32 but said that there was a risk they could fall to $22.

MR. POST came up with his $32 figure this way: he assigned a multiple of 25 to projected 2007 free cash flow of $1 — meaning that the stock would be worth $25 on the basis of that flow alone — then added $3 for the value of Yahoo Japan, $1 for the company's Alibaba operation in China and $3 in cash.

Mr. Devitt, who is more skeptical about the stock, said that it "probably does have upside" potential if Yahoo can stabilize its branded graphic display advertising and derive some benefit from Project Panama next year. In the meantime, he said, the stock is likely to languish. At Legg Mason in Baltimore, Mr. Miller, portfolio manager of Legg Mason Value Trust, told investors in August that the intrinsic current value of Yahoo was perhaps double its market price then of about $27.

The firm's optimism seems undiminished. Though it has pared its peak Yahoo position, Legg Mason Value Trust still held 19.2 million shares on Sept. 30. Yahoo's stock decline this year is one reason that the fund may fail to beat the Standard & Poor's 500-stock index after outperforming it for 15 years in a row. So far, the fund is lagging behind the index by more than nine percentage points.

Mr. Befumo of Legg Mason said that Yahoo's stock began to be "sort of crazy cheap" last month, and that other "classic value guys are actually starting to sniff around the name because, on a cash-flow basis, it's particularly cheap."

Mr. Miller was not available for comment, a spokeswoman said. Mr. Befumo contends that Yahoo's intrinsic value is in the mid-$40s, pointing to the stepped-up buybacks as evidence that the company agrees. Although he said the stock could drop into the teens if it were ever evaluated like traditional media businesses, he also said that it could leap into the $60s in the perhaps equally unlikely event that it traded at parity with Google.

At the moment, though, the gap between the stock market's valuations of Google and Yahoo is enormous. Yahoo's market capitalization is about $36.6 billion, and its price-to-earnings ratio is 34.1, based on trailing earnings. By contrast, Google has a market cap of $152.7 billion and a trailing P/E of 63.3, according to numbers available on the Yahoo Finance site.

Students of Yahoo say that while the company may be acquired, no deal is likely before Project Panama begins to show results, one way or another. Merrill Lynch figures that the project will raise Yahoo's revenue $250 million to $500 million in 2008 — and warned that investors could be "too late" if they waited to buy until Panama's rollout risks had passed.

Ultimately, Mr. Befumo said, the search engine business will shake down to a natural worldwide duopoly. "We think that Google and someone else — we think the odds are Yahoo — will do this for a majority of the Internet," he said. "Very few other people will be able to get the scale of traffic required to make it work."

NYTimes.Com

Pay-Per-Click Search Engine Marketing Handbook: Low Cost Strategies to Attracting NEW Customers Using Google, Yahoo & Other Search Engines

Don't keep secrets on cell phone

Don't tell your cell phone any secrets. It might not keep them. Second-hand phones purchased over the Internet surrendered credit card numbers and bank account passwords, business secrets and even evidence of adultery.

One married man's girlfriend sent a text message to his cell phone: His wife was getting suspicious. Perhaps they should cool it for a few days.

"So," she wrote, "I'll talk to u next week."

"You want a break from me? Then fine," he wrote back.

Later, the married man bought a new phone. He sold his old one on eBay, at Internet auction, for $290.

The guys who bought it now know his secret.

The married man had followed the directions in his phone's manual to erase all his information, including lurid exchanges with his lover. But it wasn't enough.

A company, Trust Digital of McLean, Va., bought 10 different phones on eBay this summer to test phone-security tools it sells for businesses. The phones all were fairly sophisticated models capable of working with corporate e-mail systems.

Curious software experts at Trust Digital resurrected information on nearly all the used phones, including the racy exchanges between guarded lovers.

The other phones contained:

- One company's plans to win a multimillion-dollar federal transportation contract.
- E-mails about another firm's $50,000 payment for a software license.
- Bank accounts and passwords.
- Details of prescriptions and receipts for one worker's utility payments.

The recovered information was equal to 27,000 pages — a stack of printouts 8 feet high.

"We found just a mountain of personal and corporate data," said Nick Magliato, Trust Digital's chief executive.

Many of the phones were owned personally by the sellers but crammed with sensitive corporate information, underscoring the blurring of work and home. "They don't come with a warning label that says, 'Be careful.' The data on these phones is very important," Magliato said.

One phone surrendered the secrets of a chief executive at a small technology company in Silicon Valley. It included details of a pending deal with Adobe Systems Inc., and e-mail proposals from a potential Japanese partner:

"If we want to be exclusive distributor in Japan, what kind of business terms you want?" asked the executive in Japan.

Trust Digital surmised that the U.S. chief executive gave his old phone to a former roommate, who used it briefly then sold it for $400 on eBay. Researchers found e-mails covering different periods for both men, who used the same address until recently.

Experts said giving away an old phone is commonplace. Consumers upgrade their cell phones on average about every 18 months.

"Most people toss their phones after they're done; a lot of them give their old phones to family members or friends," said Miro Kazakoff, a researcher at Compete Inc. of Boston who follows mobile phone sales and trends. He said selling a used phone — which sometimes can fetch hundreds of dollars — is increasingly popular.

The 10 phones Trust Digital studied represented popular models from leading manufacturers. All the phones stored information on "flash" memory chips, the same technology found in digital cameras and some music players.

Flash memory is inexpensive and durable. But it is slow to erase information in ways that make it impossible to recover. So manufacturers compensate with methods that erase data less completely but don't make a phone seem sluggish.

Phone manufacturers usually provide instructions for safely deleting a customer's information, but it's not always convenient or easy to find. Research in Motion Ltd. has built into newer Blackberry phones an easy-to-use wipe program.

Palm Inc., which makes the popular Treo phones, puts directions deep within its Web site for what it calls a "zero out reset." It involves holding down three buttons simultaneously while pressing a fourth tiny button on the back of the phone.

But it's so awkward to do that even Palm says it may take two people. A Palm executive, Joe Fabris, said the company made the process deliberately clumsy because it doesn't want customers accidentally erasing their information.

Trust Digital resurrected erased e-mails and other information from a used Treo phone provided by The Associated Press for a demonstration after it was reset and appeared empty. Once the phone was reset using Palm's awkward "zero-out" technique, no information could be recovered. The AP already used that technique to protect data on its reporters' phones.

"The tools are out there" for hackers and thieves to rummage through deleted data on used phones, Trust Digital's chief technology officer, Norm Laudermilch, said. "It definitely does not take a Ph.D."

Fabris, Palm's director of wireless solutions, said the company may warn customers in an upcoming newsletter about the risks of selling their used phones after AP's inquiries. "It might behoove us to raise this issue," Fabris said.

Dean Olmstead of Fresno, Calif., sold his Treo phone on eBay after using it six months. He didn't know about Palm's instructions to safely delete all his personal information. Now, he's worried.

"I probably should have done that," Olmstead said. "Folks need to know this. I'm hoping my phone goes to a nice person."

Guy Martin of Albuquerque, N.M., wasn't as concerned someone will snoop on his secrets. He also sold his Treo phone on eBay and didn't delete his information completely.

"I'm not that kind of valuable person, so I'm not really worried," said Martin, who runs the http://www.imusteat.com Web site. "I guarantee that three-quarters of the people who buy these phones don't think about this."

Trust Digital found no evidence thieves or corporate spies are routinely buying used phones to mine them for secrets, Magliato said. "I don't think the bad guys have figured this out yet."

President Bush's former cybersecurity adviser, Howard Schmidt, carried up to four phones and e-mail devices — and said he was always careful with them. To sanitize his older Blackberry devices, Schmidt would deliberately type his password incorrectly 11 times, which caused data on them to self-destruct.

"People are just not aware how much they're exposing themselves," Schmidt said. "This is more than something you pick up and talk on. This is your identity. There are people really looking to exploit this."

Executives at Trust Digital agreed to review with AP the information extracted from the used phones on the condition AP would not identify the sellers or their employers. They also showed AP receipts from the Internet auctions in which they bought the 10 phones over the summer for prices between $192 and $400 each.

Trust Digital said it intends to return all the phones to their original owners, and said it kept the recovered personal information on a single computer under lock and disconnected from its corporate network at its headquarters in northern Virginia.

Peiter "Mudge" Zatko, a respected computer security expert, said phone owners should decide whether to auction their used equipment for a few hundred dollars — and risk revealing their secrets — or effectively toss their old phones under a large truck to dispose of them.

What about a case like the Lothario whose affair Trust Digital discovered?

"I'd run over the phone," Zatko said. "Maybe give it an acid bath."

Associated Press

Site de rencontres donne des conseils pour la cam�ra - timide