Yahoo just needs to fix one thing: Monetization

Everyone seems to be chapping Yahoo’s hide these days, including even Yahoo itself — or at least one very audible Jerry Maguire over there. However while many large companies could benefit from more focus and cost-cutting, neither issue is really at the core of the company’s problems. Yahoo is still #1 in both users and page views, and will remain a leading internet property for the foreseeable future. And though some critics contend Yahoo is spread too thin, most businesses would kill to have Yahoo’s broad diversity of content and commerce properties and worldwide brand recognition.

There’s really just one big thing Yahoo needs to fix: monetization.

While Yahoo substantially outpaces Google in page views, Google does a much better job of converting traffic into dollars than Yahoo and is kicking their butt in revenue per search and revenue per page. As long as Google keeps monetizing traffic at a far better rate than Yahoo, they can always afford to pay more for acquisition or partnership deals — or at least jack up the price on anything Yahoo might want (note: possibly why a rumored deal to acquire Facebook still hasn’t happened).

So what’s the solution? Well I don’t know how to solve all Yahoo’s problems, but I don’t believe it’s about ‘too much peanut butter’. If monetization was working better, they could buy any content property under the sun and make the deal work. Rather than eliminating people or product groups, here are 3 things I’d suggest Yahoo do to right the ship:

1. Ship the new Panama advertising engine platform asap
2. Figure out a way to implement CPA-based (Cost Per Action) advertising
3. As monetization improves, accelerate acquisition activity (both large & small)

I’ll elaborate on each of these three points further below.

A Man, a Plan, a Canal: Panama!

Panama is the code name for a long-overdue upgrade to the Yahoo search engine advertising platform, and its delay last quarter contributed to the dramatic fall in Yahoo’s stock price. If Yahoo can get it out the door quickly • and if it works as promised to improve monetization • they may be in better shape to compete more effectively, both in quarterly reports and at the negotiating table. However if Panama doesn’t make a significant impact or is further delayed, look for Terry Semel to have more time to relax on a Santa Monica beach in 2007, and for private equity firms and hedge funds to stalk Yahoo and try to take it private, perhaps even sell to Microsoft.

CPA beats CPC beats CPM

Long-term, Yahoo has one significant advantage over Google it has yet to leverage: it controls point of transaction for a large collection of online commerce sites: Yahoo Stores. Furthermore via the Yahoo-eBay partnership earlier this year, Yahoo also has access to transaction info from the eBay marketplace, eBay stores, and all of PayPal’s small business websites and merchants. Why is this important? Because Yahoo might be able to use all that transaction data to implement a new, more efficient method of advertising known as CPA or Cost-Per-Action. CPA has the potential to leapfrog current CPC-based (Cost Per Click) advertising, just as Google has used CPC to leapfrog CPM-based (Cost Per iMpression) advertising. But if Yahoo and eBay take too long, Google will use its own growing pool of transaction data gathered from Google Analytics and Google Checkout to implement CPA-based advertising itself and get there first.

Attention K-Mart Shoppers: Web 2.0 Blue Light Specials on Sale

Finally, improved monetization is critical for Yahoo to better leverage partnerships and acquisitions to fuel its growth. This last point should be obvious — not just to Yahoo, but also to Google, Microsoft, eBay, Amazon, AOL, NewsCorp, and every other aspiring internet gorilla and media mogul. Here’s the basic playbook: you have millions of users, billions in cash… go find web properties with new products and features, buy them, and use your advertising platform to monetize their traffic! For Yahoo, it might make sense to look at acquisitions complementary to demographics they are lacking, or those with features that exploit popular Yahoo properties such as Yahoo Groups, Yahoo Finance, and Yahoo Answers. And if Panama doesn’t fix monetization, maybe they should go buy a startup developing CPA-based advertising.

If Yahoo can improve monetization, they should be doing small acquisitions ($25-50M) every month, larger deals ($100-500M) every quarter, and betting big ($1-2B+) once a year on a deal like Facebook or YouTube. So far, Yahoo has only done a good job on the small stuff — they’ve whiffed on most other big deals since Overture. In summary: buy LOTS of stuff, do it FASTER, then distribute it across your worldwide audience and monetize using your advertising engine.

Fortunately for Yahoo there’s no shortage of innovation available. Thanks to capitalism, entrepreneurship, Web 2.0, and lots of geeks in Silicon Valley and around the world, there are plenty of cool startups to go around.

But first, fix the monetization. Then eat more peanut butter.