How Yahoo Makes Money

It’s exaggerating the point a little, but only by a little, to state that Yahoo! Inc. was the SpaceX or Planetary Resources, Inc. of the late 1990s. Back then, a single engine through which you could search for information on this remarkable new construct called the internet was as futuristic a concept as commercial interplanetary travel or asteroid mining. Throw in a free email service, instant messaging, and up-to-the-hour news feeds, and Yahoo seemed poised to be the technology company for a new century.

Then Google, now Alphabet Inc. (GOOG) happened, offering virtually everything Yahoo did except cheaper and faster. Yahoo found itself in the curious position of taking only 18 months or so to transcend from precocious upstart into a sluggish and staid legacy company. A seriously diminished but still lucrative Yahoo has become an amalgam of disparate offerings – everything from fantasy football and celebrity gossip to web hosting and maps, and all of it packaged for Yahoo’s real clients, advertisers. (For more, see: How Google's Search Engine Makes Money.) . Today that competition has led to an acquisition by Verizon and a restructuring of the business the company was bought by Verizon after a long due diligence and procurement process and moved under a new umbrella called Oath that partners with AOL in Verizon’s media business. (See also Yahoo and AOL Will Form 'Oath)

Most of Yahoo’s business model was redundant in a sated marketplace. Almost every Yahoo service has a more prominent, more successful, and more easily identifiable competitor: Yahoo Movies (NBC Universal’s Fandango), Yahoo Weather (Weather.com, another NBC Universal property), Yahoo Sports (Walt Disney Co.’s (DIS) ESPN.com), Yahoo Screen (Alphabet’s YouTube), and the list goes on and on. But if you have an active Yahoo email account that you never bothered to close after switching to Gmail, or if you happen to click on a Yahoo-branded news link, congratulations. You are one of the select billion active monthly users whom the company claims to engage.

As of the first quarter of 2017, Yahoo reported revenue of $1.3 billion. Yahoo’s revenue previously came from two reported sources: search and display. The company further categorized both search and display revenue into that earned from Yahoo-branded and that earned from affiliated sources.

Yahoo’s quarterly revenue has been descending since a peak in 2007. Earnings before interest, taxes, depreciation and amortization have also followed the same descending trend. In June 2017,  Verizon and Yahoo finally announced a deal that valued Yahoo at $4.48 billion. Several factors made the sale unique. Yahoo’s business included an equity stake in Alibaba (BABA), the astonishingly successful Chinese monolith that serves as something of a hybrid eBay Inc. (EBAY), Amazon Inc. (AMZN) and Google to China. That stake, initiated by a previous CEO to Marissa Mayer, had been keeping Yahoo alive through most of its digression. Verizon chose not to acquire the Alibaba stake. I also chose to exclude Yahoo Japan. Yahoo chief executive Marissa Mayer was also a factor, choosing to resign once the deal was announced with AOL’s Armstrong taking the Oath CEO role.

Yahoo will be a significant revenue generator for Verizon under its media business now called Oath. In second quarter 2018 results, Verizon beat expectations for revenue and earnings by $420 million and 6 cents respectively. The firm reported that its media business, Oath, saw revenues increase to $3.8 billion for the trailing six months from $2.0 billion in 2017. Yahoo will continue to generate revenue from the same sources primarily search and display which includes a great deal of revenue from advertising.