Yahoo!’s 8.3 Million Opportunity, That You Haven’t Heard About

While Arrington arrogantly declares that all the options are understood (even as Microsoft’s shareholders appear to be backing out), there’s an angle to the Microsoft/Yahoo! acquisition bid that I think no one’s considered. I think there’s more to Yahoo!‘s value than you may realize…

A Lesson from the Gaming Industry

If you don’t know anything about gaming, this anecdote will (hopefully) be very instructive. And even if you do, it’s a good reminder. Bear with me.

Pre-2006, the console gaming industry was in a slump. The consoles in existence (Microsoft’s Xbox, Sony’s Playstation 2, and Nintendo’s Gamecube) weren’t significant improvements over the previous generation of gaming consoles, the market for console gaming was stagnant, and there wasn’t much innovation happening. No one was predicting the death of Microsoft, which was a software giant aggressively expanding into the online advertising business. No one was predicting the death of Sony, the consumer electronics and entertainment megacorp.

But Nintendo… Nintendo just did games. And despite the fact that it was in the exact same boat as the Xbox and Playstation 2, people were saying there was nowhere left for Nintendo to go. Fortunately for them, Nintendo didn’t listen.

Nintendo WiiIn late 2006, a year after Microsoft had released their new Xbox 360, and while Sony was releasing the Playstation 3, Nintendo released something completely different: the Nintendo Wii. It’s an innovative game console with a motion-sensing controller, capable of providing gaming experiences neither of its competitors can match. Not only has Nintendo given the gaming industry a kick in the ass, they both served their core customers and opened the gaming market to a wide demographic of non-traditional gamers.

What Nintendo Has to Do With Yahoo!

Yahoo! Pipes LogoAccording to Chris Kalaboukis, a director in the Intellectual Property Innovation group at Yahoo!, they are in the same position as Nintendo was”: And I agree. Yahoo! may be an amazing tech company (Yahoo! Pipes is one of the coolest tech innovations of the decade, and everyone from O’Reilly to its own competitors agree), but Yahoo!‘s core market is not techies! Nor is it tech industry analysts, or any of the other people that have been moaning about Yahoo!‘s performance in markets that Yahoo! is involved in, but not aimed at.

Yahoo!‘s core market is the internet un-sophisticate, the average user that the tech blogosphere seems to ignore or forget about so often. And Yahoo! is doing an excellent job of serving those users. Do they need to get better? Yes. Are making advancements in the same technologies Google and Microsoft work in important in that? Absolutely—but only to a certain point. Yahoo! doesn’t have to be the best search engine on the internet, and the only way it “needs” to increase its search engine market share is by increasing the number of people who use Yahoo! itself.

Search was the key technology of the late 90’s and early millennium. Google rode its success in search into becoming the premier information company of the Information Age, with products in every part of the information ecosystem. But search, while still useful, is no longer the key technology. Online services need to offer their audience the tools they need to live their life online. Search is one of those tools, but so are:

  • Information Management
  • Communications
  • Social Services
  • Mobile Services
  • Content Creation
  • Persistent Identity

… and more.

Yahoo!‘s Opportunity

So what can Yahoo! do that will solve it’s problems the same way Nintendo did: innovate, serve your core audience, open up new markets?

Yahoo! should acquire Habbo.

Habbo LogoNot familiar with Habbo? It’s a virtual world, built by Finland-based Sulake Corp, with 8.3 million monthly unique visitors. That’s only 1% of the traffic Yahoo!‘s web based properties currently receive, but here’s some food for thought:

  • 70% of Habbo’s users are between the ages of 13-16. Yahoo! isn’t going to grow its traffic in developed countries by changing the habits of today’s adult generation. It’s going to grow its traffic by earning the loyalty of the next generation.
  • The average length of a session in Habbo is 36 minutes. When’s the last time you or anyone you know spent 36 minutes on Yahoo!, MSN, or Google? Immersive environments with engaged audiences are key to increasing revenues for web services.
  • Yahoo! has an opportunity to become the expert and market leader for an advertising medium Google and Microsoft have done little to nothing with. Virtual world and in-game advertising will be as common place as real-world advertising in the future.

How does this solve Yahoo!‘s problem like Nintendo solved theirs?

  1. Innovation. Virtual Worlds are a hot tech. While it’s a bit of an apples-to-oranges comparison, Habbo has ~77 million more registered users than better-known virtual world Second Life. Potential for future development aside, just a basic integration of Yahoo! services like e-mail and IM would be huge.
  2. Serving Yahoo!‘s core audience. Plenty of Yahoo! services are built around entertainment. And Yahoo!‘s users have always responded favorably to products like chat that let them interact with others.
  3. Open up new markets. Not only will Habbo bring a younger demographic to Yahoo!, it could be a key step in increasing Yahoo!‘s penetration of foreign markets. While Yahoo! dominates in Japan, it should never stop expanding in other parts of the globe. Habbo has localized versions in 31 different countries. With Yahoo!‘s marketing power behind it, Habbo can attract more users for itself, and for Yahoo!.

Yahoo! has a lot of potential still. The fact that Microsoft would even consider going in to debt to purchase Yahoo! should be enough to prove it has worth. I hope its own shareholders will recognize that, and resist the temptation to sell. And I hope that Yahoo!‘s leaders will do a better job of articulating what Chris Kalaboukis’s analogy makes clear: Yahoo! is working hard to innovate, but it’s seeking innovations made for real people.