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Oct 9 2008 11:03AM EDT

Yahoo's Other Problem: The Shrinking Display Market

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Yahoo's plan to serve Google ads to its underperforming key words has led to monopoly allegations against Google and a delay in implementing their June partnership. The plan was supposed to bolster Yahoo's ailing search business, but now it looks like the company's cash cow -- display -- is about to suffer as well.

Amid the flailing economy, Yahoo's paused search deal with Google, and its middling plans to acquire AOL, Yahoo's stock plummeted to $13.76 a share yesterday.

And analysts are predicting that display will be in free fall this year. Bank of America's senior analyst Brian Pitz thinks that the tumbling market spells bad news for display advertising:

"Our channel checks indicate the market for display ads, particularly branded or CPM-based ads, continues to worsen beyond our prior expectations and from second quarter levels."

This is problematic for Yahoo, who relies on display advertising for 62 percent of its new U.S. revenues. The company's new ad serving platform APT hopes to ramp up usage and trust in display advertising by making it easier to launch large scale campaigns online.

But with the economy shrinking, advertisers may be increasingly wary of investing in display ads, where effectiveness is less easily tracked than in search. Pitz continues:

"Given the current market environment, we believe advertisers are likely to hold back discretionary brand-building dollars in favor of measurable search and performance-based display advertising."

And Yahoo's revenue is already slipping. In the first half of 2008, U.S. net revenue for Yahoo grew 11 percent from last year, while the overall market for Internet ad revenue rose 15.2 percent in the first sixth months of the year.

By Meghan Keane for Wired.com

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