Again with the CEO? Seriously Yahoo!?

Whenever I’ve spoke with former Yahoo! employees in the past few years, the overriding theme seems to be anger and disappointment. One does not feel emotional in this way about a company that cannot achieve; it is the mismanagement, lost opportunities and loss of direction of a team that used to consider itself a world-leader that results in such a temperament.

The question remains though, regardless of what happens in the near-term with their current CEO. Can (or should) Yahoo! be turned around, or should it be torn apart and sold for scrap?

This is the billion dollar question for its board and management, one which they have not been able to come to grips with in the five or so years during which it has been raised.

Perhaps the question should be rephrased: does the company collectively have any fight left in it, and barring that, can it be rallied by a “fight them on the beaches” moment?

Leaving this aside for a moment, the question of how Yahoo! (or any other struggling business for that matter) can be turned around is a fascinating one, one which I’ve spent significant time thinking about since the downturn. I’ve read a large number of articles on this topic (I’ll link to some of them at the bottom), and it is interesting to see the diversity of opinions on how this could be managed.

What it really boils down to is the following: there are significant challenges both in the short term and long term for them. Four CEOs (possibly soon to be five) in five years, each with their own set of priorities and direction, combined with a significant split in the board and a shareholder rebellion mean that a fix is going to involve a delicate balancing act.

A longer term return to growth is going to require incremental changes like organically growing market share, and yet simultaneously rebuilding momentum and market confidence will require (minimally) the appearance of radical, decisive action.

The fundamental problem (and it is an obvious one) is that the business has stagnated. I’ve lived this one personally: it is easy for a growing, profitable business to paper over very significant internal issues; once the growth stops though, the infighting begins, and it is never pretty.

Yahoo!’s business is fundamentally based on advertising revenue, specifically on what is referred to as display advertising, which are the large, graphic, mass media and consumer market-oriented banner ads that you can see on (for instance) their home page.

Its really just an online version of the television commercial, and indeed Yahoo! considers itself to be primarily a media company.

In order to sell ads, Yahoo! produces as much content as it possibly can, in the form of a variety of web properties (“portals”) that try to attract different kinds of users. All of its products combined, Yahoo! is still has massive (although long declining) traffic.

The issue is obvious though: there is immense competition for advertising dollars, particularly in a generally unsettled economy, and many of Yahoo!’s competitors have simply done a better job of competing.

In addition, ad revenue is making a decades-long transition that has a longer-term implication for any company that makes its money this way. From mass media to big internet media to personalized, targeted internet advertising, and now to the mobile environment, the objective has always been to find a better way to connect the advertiser to the end consumer. This has always been a competitive, fast-evolving, cut-throat industry, and it is easy for even the greatest market leaders to fall behind.

So again, does Yahoo! have the “fight” for this challenge? Because its going to take some doing.

Let’s go through some of the key items that they’re likely discussing right this minute – a SWOT analysis if you will – and see what points of interest we can find.

 The Good News

We might as well start off with the good news, because it certainly isn’t all bad.

• Yahoo! still has immense quantities of traffic – I’m not sure if this is current, but the last I heard they had around 700 million active users.
• They have some incredible “properties” – YMail, Flickr, Yahoo! Finance and many others.
• They have almost no debt, and $1.5 billion in cash and cash equivalents (after the latest layoffs, that looks like around 1 to 1.5 year’s worth of burn-rate, assuming no additional income).
• They’re still profitable.
• They still own 40% or so of Alibaba.
• The last I heard, they still own a large number of shares of Google. Can somebody confirm if this is still the case?
• They’ve built some great technologies – YUI (a JavaScript library that competes with JQuery), their IM client, toolbars, YMail, plus their contributions to the Open Source movement (particularly in the NoSQL sphere).
• The cutting is already done. At some point cutting further will cut muscle, not fat. I don’t know enough to know if that point has been reached, but a lot of the hard decisions there have already been made.
• Plus their share price is already discounted to the point where it is likely below their real book value.

The Bad News

There’s certainly a fair bit of bad news. Given the amount of laundry aired in public over the past few years, this has been discussed regularly. Not sure if I’ve covered off everything here, but here are some of the things that they’re facing:

• Many changes of management in recent years, with each new CEO bringing their own direction (or lack thereof); this has resulted in confusion.
• A lack of board cohesion.
• An open minority shareholder rebellion.
• Regular public airing of laundry.
• Staff leaving in droves.
• Loss of brand, traffic, revenue to competitors.
• Loss of control over traffic sources to Facebook.
• Microsoft (and maybe others) still circling.
• Apparently (I’ve heard this second-hand, but have not been a witness in person obviously) – lack of internal communication, lack of accountability, and some cultural issues that are hampering change.
• The possible loss in the near future, of Alibaba, which is considered by many to be their “crown jewels”.
• A potentially nasty new patent infringement lawsuit against Facebook that could divert attention and resources away from important efforts for years, and could have a variety of unpleasant ramifications.

 The Short Term

There are a number of serious fires that need to be put out, before the serious reconstruction can even begin:

• The board needs to make a decision quickly with regards to their CEO, and then needs to commit to that decision;
• In the meantime, four members of the board are leaving, and being replaced by new ones;
• While that is happening, a significant shareholder is trying to force the board to accept himself and several allies as members;
• And, to top it off, Alibaba is using every trick at its disposal in order to acquire back the 40% stake in itself that Yahoo! owns.

In the very short term, Yahoo! is going to have to make decisions about its management, board, and indeed entire direction – all full time jobs that will make it hard to begin the real hard work.

Medium Term

Once the pressing issues have been dealt with – or temporarily shelved – Yahoo! will need to start making strategic decisions about what it is, what it wishes to be, and how it intends to get there.

Each of the following items is going to involve challenges:

• Determine what the longer term strategy is going to be. This is a big one. I’ll discuss some of the (many) possibilities below. None of them are entirely satisfactory, and I’ve heard strong arguments from very well informed people for and against each one.
• Decide how to fix the culture. Changing the culture of a company is not something that happens overnight. The process might take a decade or more, and it isn’t clear whether they have that amount of time. Looking at comparative situations, they need to flatten their management structure significantly, enhance internal communication and cohesion, provide facilities for innovation to flourish, build more customer-centricity in, become more competitive and profit-oriented – without losing sight of longer term goals… I could go on. This is a large list of difficult tasks. Now that said, I’ve worked for wildly successful companies with terrible culture, and vice-versa.
• Start the process of building leadership internally. I know that there are people who disagree with this one, but I still believe that the leaders of a company should come from within. Fostering and developing leaders is a lengthy task that requires immense patience, and an ability to tolerate failure. Whether the “landing strip” is long enough for this to succeed in this case isn’t clear to me.
• Create appropriate metrics to ensure that progress can be tracked. As an outsider, I don’t know much about what they currently have. I can only quote anecdotal stories (a search online brings up many) that claim that there’s poor discipline. I’ve seen this sort of thing happen at first-hand though, and when it happens it makes the process of actually enforcing change difficult. Creating the right metrics (which is a difficult problem itself), measuring them regularly, ensuring that they align correctly with goals, and making sure that there are consequences when they are not met can help.

Long Term

The long term goal – of course – is to return Y! to growth, ensure its future prosperity and stability, and – obviously – to produce wealth for the stakeholders.

Subsidiary goals could include: cultural changes, enhanced market share in particular areas, diversifying their revenue.

In order to do this, it makes sense to take a quick look at what the world will likely look like in a few year’s time, and what kinds of changes Yahoo! will need to make in order to arrive there in good order.

It is also worthwhile to look at a few of their competitors, and what they are doing themselves to prepare for the future.

None of what I’m about to write will come as any kind of surprise.

The Strategic Landscape

Even More Mobile

The existing trend towards miniaturization of technology, higher performance, and more ubiquitous connectivity isn’t likely to change.

That means more people in the future will be working from always-connected, tiny and powerful gadgets that may very well use interfaces such as verbal communication far more than they do visual interfaces.

How to serve up advertising to this audience is already a major preoccupation at companies ranging from Apple to Google and Facebook – in addition to many non-traditional competitors such at the hardware manufacturers themselves.

The cost structure of the mobile market is currently based on heavily subsidized hardware, combined with long term profit from data plans. This is already been eroded by a) the rapidly declining price of hardware, and b) the availability in many places of free WiFi connections, which combined with VoIP can make it hard for telecom companies to make a buck.

As a result, everybody is trying to find ways to support this ecosystem via various kinds of advertising – be it extreme localization of ads, sponsorships, or the more intrusive variety that eat up screen space.

This process is already taking ad revenue away from “traditional” internet media, and the process is unlikely to decelerate. At some point, it is going to make it much more difficult to sell an ad spot on a website though, since people will not necessarily be viewing websites in browsers like they do today, but may instead be asking their phones for information, which will come back in a variety of distilled formats including audio.

Closed vs Open

The growth of closed platform, walled garden-type social websites is also going to be a challenge.

Yahoo! has been involved for years in the effort to force open the process of online social interaction via participation in OpenID and other endeavors. This is also one of the underlying rationales behind Google’s G+ system, since Google also faces the same problem (perhaps even to a larger degree).

It isn’t clear yet whether the open web, or a set of closed proprietary systems will dominate in the next decade or so – and Yahoo!’s strategy needs to accommodate both possibilities, while allowing for unexpected circumstances.

An example of how this can move against them is current news – Yahoo! has spent much effort on integrating Facebook’s login system, and on attempting to build traffic from within Facebook, with some success; this has recently been placed at risk by its patent-infringement lawsuit against Facebook. I don’t follow the strategic intent of this lawsuit, but it is fraught with risk.

Hardware Envy

It looks like pure-play software companies are losing out to companies featuring both software and hardware products. The success of Apple’s iPhone and Microsoft’s gaming platform have lead to hardware investments from companies like Oracle and Google.

Many hardware manufacturers, suffering from changes in the mobile market (RIM, Nokia and others) have consequently sought partnerships with software companies to try to combat the erosion of their formerly powerful platforms. I’m far from certain that this is wise, and whether it will last, but what I’ve been calling hardware envy has been infecting many software companies as a result.

There are three approaches Y! can take to this – either try to join ’em (i.e. via strategic partnerships or acquisitions), try to disrupt the market by doing something that undermines the “other guys” (I have literally dozens of ideas here, none of them entirely original, and all of them too long for this article!), or just wait it out and hope that the end-game isn’t worse.

Geography

Its easy to make fatuous remarks here, so I’m going to limit what I say in order to avoid foot in mouth syndrome. Obviously there are a number of developing markets with their own languages, idiosyncratic markets, internal challenges and opportunities. Y! went international early on, and currently support a large number of languages. Further study of opportunities and potential threats arising from these markets is obviously required.

Key Areas of Focus

Bearing in mind the above, there are several key areas that they need to address over the next few years:

1. Increase ad revenue

According to the most recent statistics I could find (not sure if this number is still current), Y! has about 17% market share in online display advertising in North America.

One goal could be to try to reach 20%.

They could likely buy 1% of that through acquisitions (their history of managing purchased companies will be discussed further below!), and then attempt to gain the rest through organic sales effort.

Yahoo! used to own an advertising network called Yahoo! Publisher Network. This was only available in the US, and was closed down in 2010. Ad publishing networks, such as Google’s AdSense, can be – if run properly – powerful ways to extend advertising business out to the mass market.

The key here is that they need to be actively managed. Google’s system is usually thought of as being completely automated, but they have built a massive sales and support infrastructure globally in order to ensure that it works effectively.

The question is could (or should?) Yahoo rebuild or acquire such a network in order to start gaining market share again, bearing in mind that ownership of such a network entails its own challenges, and also could potentially alienate some of their partners.

One possible benefit from selling all or part of their share in Alibaba would be that they would then have cash with which to make some strategic purchases. ValueClick (Commission Junction) – already a Y! partner – could probably be bought for around $2 billion, for instance (a bit above where it is currently trading).

Yahoo! still has a high quality customer list for display advertising, including many of the large consumer brands. This could allow them to improve the ad quality of an acquired publishing network, while extending reach and market share.

Other possibilities could include:

• At $2 billion market cap, AOL could be a target. Yes, AOL is potentially a can of worms, but there are some interesting possibilities here.
• An adjacent move into real world banner marketing, or purchase of ad agencies themselves might be an area to explore (some obvious downsides could include alienating some of their existing customers)
• Purchase of media properties from one of the big conglomerates – examples could include radio or television stations.
• Other possible purchases (not necessarily related to ad revenue) could include hardware manufacturers, an attempt to buy and graft on a consulting business (hey, everyone else seems to be doing that too!), or opportunistic e-commerce plays.

 2. Increase Traffic

Yahoo! has a vast amount of traffic already, but obviously the more they have, the more advertising revenue they can claim.

What things can they do to: a) increase traffic to existing portals, b) acquire new properties that increase traffic, c) extend traffic to new domains such as mobile?

Can Yahoo! forge new partnerships (or extend existing partnerships, such as with Microsoft or AOL) with other companies in order to tear chunks of business off of the market leaders in these areas (i.e. partnering with cellphone manufacturers, building new technologies to split that market, coming up with a better way to deliver ads to phones, finding new revenue models like ad-supported cellular service etc)?

What do they need to adjust in their content production and delivery, in order to win and support increased traffic. It might be worthwhile looking at Bloomberg’s automated content system, for instance.

3. Improve Customer Service

People forget Google’s enormous global sales and support network is what actually drives their ad sales. What things can Yahoo! do to improve the experience of their ad customers, and to drive sales of new customers?

My experience dealing with Yahoo!’s support team in the past (particularly their hosting and domain business) has been frustrating. I have heard that the support that they offer to ad agencies and large advertising customers is significantly better though.

Building a customer-centric culture into an existing organization is a very long-term endeavor, but they need to start somewhere.

 4. Diversify Revenue

Like everything else in this article, this one is easier said than done, and many of their competitors have had little luck doing so either.

Where Yahoo! might succeed is that they have developed a large number of internal technologies that have been open sourced, and which have significant usage elsewhere.

Building a service business to try and score revenue off of these technologies might be feasible. A close examination of other technology companies that have had success in this area might provide clues.

As an “underdog”, it is also possible that an attempt to build a platform of technologies used to build the web would not be viewed as a threat competitors, and would also be viewed as benign and helpful by potential customers.

Yahoo!’s existing support for several Open Source communities could also be examined for potential revenue streams.

Buy vs Build vs Exit

Like many other companies, Yahoo! has a decidedly mixed history when it comes to managing large acquisitions. The process of realizing just how difficult it is to integrate a purchase is something that the business world has only really come to grips with since Dot Crunch. They’ve often bought companies only to resell them for significantly less later on, or to lose key personnel as soon as the options vest. This isn’t unique at all; it should, however, be factored into any recovery strategy that includes purchases, particularly large ones.

Yahoo! clearly has some ability to build new technologies in-house, but they seem to want to view themselves primarily as a media company, and that may reduce the desire to do so in the future.

There’s also been a significant effort over the past few years to close or sell non-core or non-profitable businesses.

Obviously, Y!’s strategy is going to include a mix of these three approaches, but there needs to be a general direction to it all, rather than random pruning of anything that sticks out. I find GE’s famous strategy (1st, 2nd or out) to be slightly too Manichean for my taste, but perhaps something like it might apply here.

 The Competition

Its pretty clear that Yahoo! considers Facebook to be its primary competitor, likely followed by Google, Microsoft and Apple, not necessarily in that order.

Here’s the thing though: I firmly believe that’s looking much too short term. I’ll give you an example:

Apple makes money by building wonderful little gizmos that they sell to telecom companies for $800, and then the telcos turn around and sell them to millions of consumers for $600 or less, with the hope of eventually profiting off the monthly phone and data plans that come attached.

Now picture a new gizmo. It sells for $5, can do everything that the Apple gizmo can do, only better, and the best part of all – it doesn’t even need a phone company to work. These are all existing technologies, at the lab or hobbiest level today. Its going to happen at some point. And then the whole market will be strategically disrupted and everything will change.

The same thing applies to every one of Y!’s competitors, in addition to Yahoo! itself. This is why viewing any one of these companies – and reacting to it – as if it was primarily a competitor is a silly short term game. By all means compete with them, but also partner with them, build relationships with them and whoever eventually replaces them, and (this is the critical part) focus on innovation and long term strategy.

Conclusions

Can Yahoo! be fixed? Should it?

I’m not sure. I’ve met many people who would love to try though.

It would be a challenge on the same level faced by Gerstner or Welch or any of the other folks now featured in MBA textbooks. A challenge of monumental, historical proportions.

I don’t know if it is fair or not to the shareholders – or the staff – of the company to take on that challenge.

The safe bet now is the same as it was in 2007 when Microsoft came knocking, although obviously the price would be quite different now.

It looked to me like their board of directors had decided to go for the glory in January, but the latest scandal may cause them (or whoever replaces them at the next AGM) to reconsider.

Either way though, I’ll be watching with great interest.

Update – 21 May 2012

As expected, Yahoo!’s new CEO, Ross Levinsohn moved quickly to resolve the Alibaba dispute. They’ve just announced a deal to sell half of the 40% stake back to Alibaba, with various options for resolving the remainder after their IPO.

My best guess is that we’ll see a couple of other newsworthy moves in the next few weeks, as they try to demonstrate immediate progress – look for a strategic  acquisition or something along those lines.

Some Links

There are a large number of topics I didn’t have room to discuss at all in this post. If I had tried, it would have been much longer than it already is, and even more unreadable. Some of these brilliant people have already talked about many of the things I had in mind, and in some cases a long time ago.

• More about “resume-gate” (there are hundreds of other articles now): here and also here, and for an opposing viewpoint here.
• Speculation about Alibaba buying back at least part of Yahoo!’s stake: article from Forbes
• About the Facebook patent lawsuit: here and also here
• Regarding customer service: here
• A few posts elsewhere on various strategic topics: here, here, here, here and here.
• And on fixing their culture: here