Technology

Yahoo's Search for a Vision


Of the many possible paths the struggling Internet company and CEO Yang can take, a strategic direction must be step one

Everyone from Wall Street analysts to former employees to advertising firms seems to know just what struggling Internet pioneer Yahoo! (YHOO) should do to turn itself around. And each "solution" is a doozy: Lay off hundreds or even thousands of employees. Get out of the search ad business and just use Google (GOOG). Sell out completely to Microsoft (MSFT).

As persistent as all these rumors have been over the past year or more, the most radical versions of those moves are still unlikely to happen until Yahoo addresses it's overriding problem: Its leaders—in particular co-founder and Chief Executive Jerry Yang—need to decide once and for all what Yahoo stands for in a new era dominated by search and social networking. And they must clearly articulate how they're going to get it there.

Start at the Top

So far, that hasn't happened. Last October, Yang outlined a strategic direction that to many observers was more of a three-pronged to-do list than a cohesive vision of Yahoo's future. He said Yahoo would look to be the starting point for Internet users, extend its ad offerings to other sites, and open up its technology base to outside programmers and publishers to come up with spiffy new services for the company's Web pages.

But many people, most of all investors, don't think any of that will help consumers understand why they should spend more time using Yahoo than Google, Facebook, MySpace (NWS), or countless other services growing much faster in popularity. Even people at Yahoo, says one executive, aren't sure which projects they should focus on, so efforts to improve services continue to move slowly. "I don't think they understand where to go," says Sramana Mitra, a Silicon Valley Web strategist who has written extensively about Yahoo's challenges on her blog. "They're running around like chickens."

With inadequate direction from Yahoo's leadership, it's no surprise that nearly everyone has advice. Here's the rundown on the possibilities—none of which seem likely to get Yahoo back on track in the absence of more fundamental thinking on Yahoo's raison d'être:

Slash and burn. Fire 2,000 employees, Bernstein Research analyst Jeffrey Lindsay advised in a Jan. 11 report. He said that would give Yahoo more profits to pursue initiatives such as mobile search and video as well as acquisitions. The company is mulling layoffs, but more in the range of hundreds of employees. Deeper cuts, flagged privately by people at Yahoo as unlikely, sound more like wishful thinking by investors than sound advice. They presume that Yahoo is stumbling toward death's door when it's not: In its fourth-quarter report Jan. 29, the company is expected to show a 15% gain in sales, to $1.4 billion, though profits are expected to fall.

And despite a stock price that's fallen 41% from last year's Oct. 26 peak, a steady departure of executives, and continuing losses in its share of the Web search market to Google, Yahoo boasts strengths that belie the dire predictions of doom by naysayers. Yahoo gets 500 million visitors a month, still the most on the Web, and remains a leader in key areas such as e-mail, sports, and financial news and information. "They continue to have a ton of traffic," says Kevin Lee, executive chairman of digital ad firm Didit.

That said, some layoffs seem both necessary and likely. Yahoo's major acquisitions over the past year, such as Right Media, BlueLithium, and Zimbra, surely created redundant positions. If they haven't been eliminated already, it's time.

Give in to Google. Lindsay and others also think Yahoo should give up on its search efforts and just pay Google to drive its search engine. It's easy to understand why. Yahoo keeps losing search market share to Google, whose engine handles from 56% to 66% of all queries, depending on who's counting. By contrast, Yahoo's share is usually from 18% to 21%. "The text-ad war has been lost," says Scott Rafer, CEO of ad network Lookery and former CEO of MyBlogLog, which Yahoo bought a year ago.

But others think Yahoo would be crazy to cede such an important front, not to mention control of the Web's most lucrative advertising opportunity. "It's a pretty critical component of getting people to start with Yahoo and stay there," says Ned May, director and lead analyst at market researcher Outsell. Just as important, data from searches, still the most important indication of a user's intention to buy, ultimately may prove crucial for targeting display ads to individuals as well.

Notably, marketers and ad firms are rooting for Yahoo because they want a stronger No. 2 just to keep Google honest. "I would hate to see Google become almost a monopoly," says Lee. If Yahoo can keep making even mild progress in search advertising—its revenue per search rose 20% in the third quarter—keeping it in-house seems worthwhile.

Sell out to Microsoft. If there's one rumor that keeps coming back again and again, it's this one. And with every replay, the speculation seems ever more driven by investors looking for a quick exit than by any actual deliberations by Yahoo or Microsoft. The software giant, which only last year spent the most it has ever put into an acquisition with the $6 billion purchase of aQuantive, seems unlikely to put up the upwards of $27 billion it would take to buy Yahoo. Such a deal would also carry big risks, as the merged company would likely lose even more ground to Google in the time it would take to integrate Yahoo's and Microsoft's operations and businesses.

Double down. In an impassioned call on the blog GigaOm on Jan. 22, Mitra advised Yahoo to forget about downsizing and "please put up a fight." She said Yahoo has an unmatched opportunity on the emerging new Web, which she views as being dominated by highly specialized services. So, she advises, Yahoo should consider buying jobs site Monster.com (MNST) to complement Yahoo HotJobs, photo service Shutterfly to go with Yahoo's Flickr site, travel sites such as Expedia (EXPE) or Priceline (PCLN) and more, to fill out the portal's strengths in these specialized markets.

Problem is, Yahoo doesn't seem to have the resources to get this aggressive. Its cash position of $2.2 billion trails laughably behind Google's $13 billion stash and Microsoft's $19 billion trove. And the stock market clearly isn't valuing Yahoo's shares enough to make them a powerful currency for deals. As much as Yang may want to follow this path, it's unlikely he can.

There's little doubt that very soon, Yahoo will need to focus on its potential advantages and jettison more operations that aren't gaining traction. It has already started to do that, by buying ad firms Right Media and BlueLithium and deemphasizing flagging operations such as music, auctions, and third-tier social networking efforts like Yahoo 360.

No doubt more will be announced or at least hinted at during the Jan. 29 earnings update. Maybe there will be a significant layoff that will cut the fat or the old guard holding Yahoo back. Perhaps there's a remote possibility of something more daring on the search front. But more than anything else, investors, partners, and employees will be looking to Yang for one thing: a clear, unmistakable statement about Yahoo's strategic direction.


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