Inside Business

December 7, 2011 9:14 pm

Yahoo needs hard decisions not magic wand

Web brand looks to revive core internet services, says Richard Waters

If you were running Yahoo, what would you do to revive its core internet services?

That question, or something similar, is being asked all over Silicon Valley and the internet industry – not just by the Yahoo board, which is looking for a permanent replacement to Carol Bartz, the ousted chief executive; but also by private equity investors such as Silver Lake and TPG that hope to buy a big stake and bring new leadership to one of the best web brands.

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Many of Yahoo’s shareholders would argue that this is the wrong question to put at the top of the board’s agenda, or at least that the company is going the wrong way about answering it. Two-thirds or more of its value is tied up in its stakes in Alibaba, the Chinese e-commerce company, and Yahoo Japan, so the quickest way to reward shareholders is to sell these.

If anything, the company’s preferred way of reviving its core services – to bring in outside investors who would be instrumental in determining its leadership and strategy – adds to the unease. It would dilute existing shareholders and give the new investors a slice of any future profits from the Asian assets, while entrenching the existing board.

Putting aside those not-inconsiderable quibbles, though, the question remains: what should a new chief executive actually do?

There is no magic wand to be waved. Yahoo still attracts hundreds of millions of users and its services in areas such as sports and finance remain clear leaders. Its problem has been declining user engagement in an age of Facebook and Twitter, and the challenge of maintaining its premium positioning with advertisers as inventory elsewhere on the web explodes. These sound like very much like the problems of Old Media, and they won’t be solved overnight. But these three things should be high on the “to do” list:

● Stop the staff desertions. The biggest immediate risk to Yahoo comes from an exodus of talent. There needs to be a vision of why the world needs Yahoo, one capable of inspiring the troops and help it fight the Silicon Valley talent wars. Pitching itself as an open alternative to Facebook and Google and identifying internal projects that can generate real buzz among its own staff are a first step.

In the process, Yahoo needs to make clear, once and for all, that it is primarily a technology enterprise, not a media company. Content has its place – but, as AOL seems to be showing, trying to build a turnround on content acquisitions is a losing proposition.

For Yahoo, the challenge is more about building “stickier” experiences around its content. One answer is in plain sight: a recent alignment with Facebook has already boosted engagement on Yahoo News. It should go all-in with Facebook – no need to follow Google into trying to build a rival social network.

Meanwhile, large dollops of restricted stock and cash will need to be lavished on all sides to attract and keep the best engineers and product managers. This is likely to become expensive.

● Move faster. A new culture that unblocks Yahoo’s sclerotic development process and silo-bound product teams will not be built overnight. Some headway has already been made under new product development boss Blake Irving, but it needs to move much more quickly.

The question of acquisitions is also likely to figure prominently as Yahoo’s board contemplates the cash at its disposal from a new investor and extra leverage that is likely to be part and parcel of any deal. But it should tread carefully: a spate of failed “Web 2.0” acquisitions several years ago is a reminder of how hard it is to graft innovative start-ups on to a malfunctioning group. The core must be fixed first.

● Hire a new board. Leave aside, for a moment, the fact that Yahoo’s board led the company into this mess in the first place – it bungled an attractive takeover offer from Microsoft and then left the company exposed by simultaneously ousting its chief and announcing a strategic review. The mere fact that the board has looked outside for leadership and direction amounts to a savage self-indictment. Shouldn’t the directors have the contacts, ideas and experience to dig themselves out of their own hole?

Once a new chief has been installed, this calls for another clear-out of the current board of directors. Credibility is much in need, and is the main argument for bringing in an outside investor.

When that happens, tough questions will be asked about co-founder Jerry Yang, the man many investors blame for mishandling the Microsoft deal. Yet a co-founder who can still inspire loyalty and act as a reminder of the innovative spirit on which Yahoo was built is an asset.

There should still be a seat for Mr Yang – but he should also think about spending more time on the golf course, which is where he had gone in semi-retirement before Microsoft first came calling.

Richard Waters is the Financial Times’ West Coast Managing Editor

richard.waters@ft.com

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