Editorials

SAN FRANCISCO — A slowdown in online advertising is translating into a painful comedown for the Internet’s glamour stock, Yahoo! Corp., and other popular Web sites that sell ads to pay their bills. 

For the sixth straight day, Yahoo! stock suffered through a wave of selling Friday, falling $2.81. The Santa Clara-based company’s market value has plunged by $10.5 billion, or 15 percent, since Aug. 30 amid deepening investor worries about the flagging market for online ads. 

The pall hanging over Yahoo! – the owner of the world’s most popular Web site and one of the few profitable Internet businesses – threatens to spread to other companies whose fortunes are tied to online advertising. 

“If Yahoo! has a cold, then other Internet companies could get the pneumonia,” said Rick Kimball, general partner for Technology Crossover Ventures, a venture capital firm in Palo Alto. 

Yahoo!’s problems have thrown several other new media stocks into a September funk. Shares in prominent new media companies such as Inktomi Corp., Ask Jeeves Inc., DoubleClick Inc. and About.com also have suffered in the past week, although not as badly as Yahoo!. 

Analysts disagree on just how badly the online advertising market is ailing. But virtually everyone agrees that online advertising isn’t growing at the robust clip of nine months ago, largely because the e-commerce companies that propelled the spending are no longer flush with cash. 

Following an April market meltdown among dot-com businesses that weren’t making money, the venture capitalists financing those companies tightened their purse strings. As a result, many online companies slashed their marketing budgets to save money, putting a crimp in the revenue stream at Yahoo! and other major online ad space sellers. 

“Online advertising has been in the doldrums all summer,” said Dave Smith, president of Mediasmith, an online media planning agency in San Francisco and New York. 

To lure business, Yahoo! and other popular online sites have been lowering their advertising rates, reversing their direction of a year ago. 

The average online ad rate fell from $33 per thousand unique visitors at the end of 1999 to $31 during the summer, according to AdRelevance, a division of Media Metrix, which tracks Web traffic. 

No one expects Yahoo!’s revenues to fall precipitously, but the company is unlikely to produce the dramatic financial gains that helped make its stock a Wall Street darling.  

Blodget predicts Yahoo!’s revenues in the quarter ending Sept. 30 will total $280 million. 

Besides a short-term loss in ad revenue, Yahoo! and other Web sites are facing concerns that banner ads – the flashing online billboards that route traffic to an advertiser’s site – aren’t living up to expectations. 

An estimated 4 percent to 5 percent of site visitors used to click on banner ads. The average “click-through” rate on banner ads is now 0.5 percent or lower, according to advertisers.