how-does-yahoo-make-money

How Does Yahoo Make Money? Yahoo Search Business Model

Yahoo made over $5 billion in revenues for 2016. Those primarily consisted of search and display (both served on Yahoo Properties and Affiliate Sites. In 2017 Yahoo got purchased by Verizon for $4.5 billion. Yahoo is now (together with AOL) part of a new Verizon Business Unit, called Oath, which aim at competing against Google and Facebook.

Yahoo revenue generation explained

Yahoo makes most of its revenues from search and display ads. The remaining part comprises listings-based services revenue, transaction revenue, royalties, patent licenses, and fees revenue.

Yahoo Search Revenue

When users on Yahoo search pages from mobile or desktop click on text-based links to advertisers’ websites, this is when revenue is generated. Indeed, this is a paid click. Those paid clicks can be performed on both Yahoo Properties and Yahoo Affiliate sites.

Yahoo recognizes revenues from search advertising on Yahoo Properties and Affiliate sites based on Paid Clicks defined as when “an end-user clicks on a sponsored listing on Yahoo Properties or Affiliate sites for which an advertiser pays on a per click basis.”

Display Revenue

Display revenue is recorded when graphical, non-graphical, and video advertisements (“display advertising”) is shown on both Yahoo Properties and Affiliate Sites. Revenue is recorded based on specified criteria such as the number of impressions during a fixed period targeted to a specific audience or in a particular placement.

Also, Yahoo earns revenue from non-guaranteed display advertising, which includes native advertising.

Therefore revenues are recognized both as impressions or clicks on display advertisements, including native advertising. An Impression is defined as an advertisement appearing in pages viewed by users. Clicks are delivered when a user clicks on an ad.

Other revenue

Other revenues include:

  • listings-based services revenue
  • transaction revenue
  • royalties
  • patent licenses
  • and fees revenue

Listings-based services also include classified advertising, such as Yahoo Local, which revenue gets recognized when services are performed. Those services include transactions generated on Yahoo Properties, such as Yahoo Small Business, Yahoo Travel, and Yahoo Shopping.

Microsoft Search Agreement Explained

To understand Yahoo monetization strategy, it is critical to understand its agreement with Microsoft over the years.

The search agreement between Microsoft and Yahoo determined the percentage of revenues generated from Microsoft’s services on Yahoo Properties and Affiliate sites to Yahoo. Revenue Share Rate was 88% for the first five years of the Microsoft Search Agreement. It increased to 90% on February 23, 2015.

After a change to the search agreement (called Eleventh Amendment), the Revenue Share Rate increased to 93%.

As specified on Yahoo annual report for 2016:

The term of the Microsoft Search Agreement is 10 years from its commencement date, February 23, 2010, subject to earlier termination as provided in the Microsoft Search Agreement. As of October 1, 2015, either the Company or Microsoft may terminate the Microsoft Search Agreement by delivering a written notice of termination to the other party. The Microsoft Search Agreement will remain in effect for four months from the date of the termination notice to provide for a transition period; however, the Company’s Volume Commitment will not apply in the third and fourth months of this transition period.

Approximately 37% of the Company’s revenue for 2016 was attributable to the Microsoft Search Agreement.

Yahoo Traffic Acquisition Costs

tac-yahoo

The traffic acquisition cost is a critical metric to assess the success of a business model based on traffic. That applies to websites in general, yet that is even more important for search engines. It is therefore important to keep monitoring it to make sure the business is profitable in the long run.

We’ve seen already the traffic acquisition cost strategy of Google and the traffic acquisition cost of Baidu:

baidu-traffic-acquisition-strategy
As any digital business, Baidu needs a continuous stream of traffic to monetize its pages. In 2017 Baidu managed to lower its Traffic Acquisition Costs as a percentage of its revenues at 11.4%. Primarily driven from its Baidu Union Members, and its iQIYI services. The former allows Baidu to have inexpensive content served by third-parties members. The latter will enable Baidu to have high-quality premium content at a low cost.
traffic-acquisition-cost
Over the years Google has been able to reduce its traffic acquisition costs and in any case to keep it stable. In 2017 Google spent 22.7% of its total advertising revenues (over $21 billion) to guarantee its traffic on several desktop and mobile devices across the web.

Source of financial information: Yahoo Annual Report 2016

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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