As Display Advertising Spreads, Problem Goes Beyond Yahoo! (YHOO)

Almost every man, woman, and child in America knows that Yahoo! (YHOO) is going to have to cut costs. There has been evidence for sometime that internet display advertising, which has been growing at a remarkable rate for over five years, has begin to slow significantly. A deep recession may even move its annual increase to the single digits next year.

Yahoo!’s house is build on the premise that display advertisng will continue to do well. That foundation is no longer an assurance of success.

According to The Wall Street Journal, Yahoo! may lay-off well over 1,000 poor souls. Investors have thought the company’s expenses have been bloated for a long time. The cuts may get them in line with the real revenue prospects of the company.

Yahoo! is probably not going to be sold to Microsoft (MSFT). It may not even merge with AOL. That means that the board, sitting in with its new member Carl Ichan, has to assume that the portal company is on its own. With its shares down by more than half from their 52-week high someone has to pay for the firm’s bungled plans. In this case, it will be the rank and file.

What is bad for Yahoo! is almost certainly bad for every major media conglomerate with has significant exposure to the internet for its revenue growth. Analysts would argue that Time Warner (TWX), News Corp (NWS, and Viacom (VIA) are the worst off of the bunch. AOL, MySpace, and the online version of MTV could be financially scuttled by a sharp fall-off in online display advertising.

Almost all of the projections about display ad growth are now proving to be wrong. Some of that is because marketers are turning to search advertising from Google (GOOG) as a more effective way to get customers. But, the other reason was within the control of the media companies themselves. They assumed that a new business, in this case the internet, worked so well that it would have extraordinary growth stretching beyond the horizon. Since that sort of projection rarely turns out to be true, they should not have assumed it at all.

Douglas A. McIntyre