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Yahoo focuses on its free e-mail service

It hopes upgrades help company as it breaks away from search business

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Yahoo! may have thrown in the towel on the business of searching for information online. But the company is doubling down on a technology where it already has the lead over search king Google: in free e-mail service offered over the Web.

During an event at its Sunnyvale, Calif., headquarters on Aug. 24, Yahoo unveiled a new design for its Yahoo Mail service. The updated version of the e-mail service lets users merge their in-boxes with other Internet services so they can send invitations using Evite or organize photos with Xoopit without having to leave Yahoo's familiar e-mail environs.

Social networking features such as Twitter-like status updates have also gained new prominence on the upgraded site, now available to U.S. users and scheduled for a worldwide rollout in coming weeks. The idea is to keep users coming back for more Yahoo services due to the frequency with which they check their e-mail.

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For more than a decade, Web-based mail services have served as the glue that keeps millions of users returning to Yahoo. The latest round of improvements is a sign that the company plans to defend its lead among Web mail services in the U.S. by making the site more relevant to consumers, who have many options for keeping in touch. While e-mail rivals Microsoft and Google appear focused on funneling e-mailers to their more profitable search engines, Yahoo executives say that e-mail can be a profitable standalone business.

(Msnbc.com is a Microsoft-NBC Universal joint venture.)

Microsoft deal frees Yahoo to focus
The enhancements to Yahoo Mail are also a chance for the company to prove its technical prowess at a time when critics see the company primarily as a media business.

Yahoo essentially quit the Web search business via a July deal with Microsoft to outsource its search capability in return for ongoing payments from Microsoft for the right to serve ads on Yahoo pages. According to Yahoo, the deal has freed up more resources to train on products such as e-mail. The search deal "allows us to invest in the rest of the audience properties at a faster pace," says Bryan Lamkin, senior vice-president of Yahoo Applications. E-mail "will be one of the key recipients of that focus."

Yahoo's e-mail service doesn't appear to be a big moneymaker in its own right. Display ads served on e-mail sites typically perform worse than those paired with, say, news articles, according to analysts. In most cases, the ads don't cover the high cost of developing and running a free e-mail service. Yahoo also has a small premium service that does away with ads in exchange for a $20 annual fee, which "hardly anybody uses," says Sara Radicati, president and CEO of the The Radicati Group.

What e-mail does accomplish for Yahoo, Google and Microsoft is to help circulate traffic to higher-profit pages, such as Web search and news. "People check their e-mail multiple times a day and that keeps driving them back to the portals and using other properties on those sites," says Cowen & Co. analyst Jim Friedland. Adds David Hallerman, senior analyst with marketing researcher eMarketer: "It's a loss leader."


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