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The recent quarterly earnings announcements from Yahoo! and Google show just how far Google has come. Google's market cap is now a mind-bending $144B at last glance - 4 1/2 times that of Yahoo! Google seems to go from strength to strength while Yahoo! - once the darling of the web - now looks lost.

Can Yahoo ever regain its pre-eminent position on the Internet? Not if it continues to compete head to head with Google. Google has the financial and intellectual firepower to outgun just about any company that goes at it head-on. Instead, Yahoo! needs to focus its relatively limited resources in a few key areas and make some difficult strategic decisions:

  • Concede search to Google. It may sound heretical for Yahoo! back off on search, but the fact is that Google has won the search battle and the sooner Yahoo! realizes this the better off they will be. Yahoo! is plowing untold resources into its long-delayed Panama project in an effort to catch up with Google's extraordinary search and advertising platform. But it seems unlikely that Yahoo! will ever reach parity in this area and the company could redirect those resources into areas where it can win.
  • Go vertical. It's easy to forget that Yahoo! is still the most visited site in the world and the way it got there is through strength in applications like email and depth in vertical areas like finance, shopping, etc. Google's attempts at breaking into vertical areas has been their one notable mis-step. With one or two exceptions, Google's entries into verticals like video, finance, email have not been barn burners. Yahoo owns vertical and it needs to extend its lead in this area by making sure all of its categories - from autos to yellow pages - are best of breed. This is a core competency that Yahoo! has and must build on.
  • Tap into blog power. Blogs are huge and only getting bigger - 75,000 new ones surface every day - but neither Yahoo! or Google owns this area. Yahoo! should buy Technorati, which has become the default blog search engine. Combining Technorati with Yahoo's recently acquired Del.icio.us social bookmarking site could be the start of a blog portal. Yahoo! started life as a directory of web sites (a quaint notion that you could actually list and categorize all the web sites in the world, back when there were 50 or so), so it knows how to organize information. This is different than searching - with searching you find what you're looking for. By organizing blogs, Yahoo! could help people find what they didn't know they were looking for.
  • Power up video ads. With Google's acquisition of YouTube, it's a foregone conclusion that video will be the next - and possibly most lucrative - form of Internet advertising. Yahoo! needs to recognize this trend and get in front of it. Yahoo! should actively work with its advertisers to start deploying video ads throughout its sites. This is an area that Yahoo! must choose to expend resources in a very visible way. Even with the YouTube acquisition, there won't be a clear winner in video ads for some time. Yahoo has lost the battle of text ads - it can't lose the battle of video ads.
Most of all, Yahoo! needs to recognize that the landscape has changed forever and that it needs to start being proactive about forging its future. There's still a good chance that Yahoo! can compete with Google, but the time to start is now.

Source: How Yahoo Can Beat Google: Start By Conceding Search