Seeking Alpha
Value, special situations, research analyst, registered investment advisor
Profile| Send Message| ()  
With MySpace.com having come under the wings of News Corp. (NWS) and YouTube Inc. slated to join the Google Inc. (GOOG)family, there's much pressure on Yahoo YHOO) to get into the peer-content arena. But even if Yahoo were to acquire Facebook, the top name among peer sites that haven't yet hooked up, shareholders cannot rest easy. After all, Yahoo had already planted strong stakes in peer content but failed to gain traction, thus leaving room for MySpace, et. al. to grab the glory.

Consider the following remarks in a Jan. 28, 1999 research report by J.P. Morgan analyst Lillian J. Lo:

Yahoo! announced a pending acquisition of Geocities, Inc., the leader in Web-based communities and personal publishing tools. We view this acquisition as very positive for Yahoo! because it brings together the tremendous reach of the two companies...

GeoCities is the leading community web site. It has more than 3.5 million home pages authored and hosted on GeoCities and has built one of the largest online communities. The company's web publishing tools allow users to easily create and publish content on the web. It is one of the most popular websites; according to Media Metrix, GeoCities.com is the third most popular site.

Substitute MySpace or YouTube for Geocities, and News Corp. or Google for Yahoo! and it's easy to see how history seems to be repeating. But an encore would not necessarily be a positive.

Even before being acquired by Yahoo, GeoCities found itself clashing with users over the obtrusiveness of adds and branding inserted by GeoCities into user sites, most notably, a "watermark" that stayed fixed in the bottom right portion of the screen no matter where the viewer scrolled. According to Wikipedia, "[m]any users felt the watermark interfered with the design of their webpage and threatened to move their webpages elsewhere. The watermark also had cross-browser issues and clashed with the markup of some pages. Geocities said in a press release that the company had received upbeat feedback regarding the watermark."

Rather than putting out that fire, Yahoo, after purchasing the site, added fuel by issuing new terms of service to establish that Yahoo, not the users, owned all content on user sites. The short-term result: According to Wikipedia, "users soon began to leave en masse in protest at the new Terms of Service." The long-term result: MySpace, YouTube and Facebook, rather than GeoCities, are cited nowadays as leaders in peer-content Web sites.

Yahoo's failure to keep GeoCities at the forefront of community Web sites is not a one-off issue. Other efforts include Yahoo Groups and Yahoo Clubs.

Perhaps Yahoo! has learned something over the years. Many in the Internet arena have matured since 1999. Indeed, the GeoCities watermark is long gone and the ads now, although conspicuous, no longer seem overly intrusive.

It may seem unduly harsh to single out Yahoo's prior shortcomings in this arena since News Corp. has not owned MySpace long enough to allow us to pronounce that deal a long-term success, while Google has yet to get off the ground with YouTube. Perhaps they'll fare no better. Another scenario would be that new generations of younger users find something inherently appealing in venues not used by prior generations, a novelty factor fans of the old America Online can wonder about. Ditto those who remember when MTV was "it."

Questions about whether Web communities can successfully go corporate apply across the board, but seem especially pressing for Yahoo given its history and that a Facebook combination remains a rumor, not a fact. And in terms of the broader day to day business, Yahoo seems to be the one most on the defensive. Table A shows that estimates for Yahoo have plummeted over the course of the past year, while those for Google and News Corp, have risen.

yahoo eps

At first glance, it may seem as if Wall Street is already tuned into Yahoo's issues. Table B shows that analysts are less bullish on Yahoo than they are on Google or News Corp.

internet stock rating

Actually, though, even a 2.03 average rating is pretty positive. Table C, which compares Yahoo to Amazon.com Inc. (AMZN) and eBay Inc. (EBAY), shows the extent to which analysts are willing to drop ratings on big-time Internet names when they have concerns; a confusing digital download strategy at Amazon.com and decelerating revenue growth at eBay's.

yhoo analyst ratings

Moreover, Yahoo shares are more richly valued than Google or News Corp. relative to estimated near-term earnings per share and the projected long-term EPS growth rate.

internet stock valuations

None of this is meant to suggest that Google or News Corp. are ultimately destined to succeed in peer content or that Yahoo will falter. But given the current lay of the land, and Yahoo's track record in the space, it seems that wishful thinking may be most prevalent in the latter.

At the time of publication, Marc H. Gerstein did not own shares of any of the aforementioned companies. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.

Source: A Yahoo Acquisition of Facebook Would Be No Panacea