The end of Yahoo?

Stiff competition, a lack of direction and falling profits pose major questions about whether Yahoo has a future, John Hearne reports

AT 6.06pm on Sept 6 last, Yahoo chief executive Carol Bartz put in a scheduled call to chairman of the board Roy Bostock.

When he came on the line, he began reading a prepared statement, the import of which was very simple. You’re fired. In the hours that followed, the press received a carefully worded statement from Bostock, in which he thanked Bartz for her service to the company “against a very challenging macro-economic backdrop”.

Bartz meanwhile sent out an email to the company’s 13,000 employees. “I am very sad to tell you that I’ve just been fired over the phone by Yahoo’s chairman of the board. It has been my pleasure to work with all of you and I wish you only the best going forward.”

Twenty-four hours later, she called Fortune Magazine and dispensed with the niceties. “These people fucked me over.” She said, lambasting Bostock for his prepared script, and branding the entire board ‘doofuses’. The way Bartz saw it, Bostock and co were simply impatient. She had been hired in January 2009 to turnaround a struggling giant. Two-and-a-half years were never going to be anything like enough time. When she took over, the company was losing revenue, it’s share price was languishing and competitors like Google and Facebook were eating into its market share. In response, Bartz slashed costs, instigated lay-offs, parcelled off parts of the business and agreed a major deal with Microsoft on search.

When fourth-quarter results for 2011 were released last month, they confirmed the trend. Gross revenues down 13%. Net income down 5%. Annual gross revenue peaked in 2008 at $7.21bn (€5.4bn). Three years later, that figure had dropped by a massive 31% to $4.98bn.

Revenue, obviously the most important category on the scorecard, wasn’t the only one on which Bartz did badly. According to comScore data, the number of minutes that US website visitors spent on Yahoo sites during her two-and-a-half years as chief executive fell by 33%.

Reports also suggest a talent exodus since she took over, while approval ratings among employees dropped from 90% on her arrival to 24%.

But the company’s failure to perform against its peers is what rankled most with the board. In the same period that Yahoo’s revenues contracted by 31%, Google’s rose from $21.8bn to $37.91 bn, an increase of 74%. Yahoo’s stock price remained flat throughout Bartz’s tenure, while the Nasdaq rose more than 60%, Google rose 70% and Amazon climbed by nearly 300%.

In Bartz’s favour, poor morale and failing revenues are common side effects of any kind of rationalisation. Yahoo was in trouble long before she took over, and as Bostock pointed out, the external environment could hardly have been more challenging.

The analyst consensus, while sympathetic, doesn’t really buy it. Roger Kay of Endpoint Technologies says he’s not ready to blame the board for Bartz’s failings. “It’s true, she didn’t have very much time, but she never struck me as overwhelmingly inspiring.”

The Yahoo story begins, as so many other internet sensations have, with a couple of Ivy League PhD students having fun with technology. Early in 1994, David Filo and Jerry Yang were studying electrical engineering at Stanford University when they put together a compendium of their favourite web links which they called ‘Jerry and David’s Guide to the World Wide Web’.

As these lists became longer and more unwieldy, they developed a system of categories and subcategories which would eventually refine itself into Yahoo.

Though the internet was still in its infancy, there was sufficient chaos in what was there for Filo and Yang’s guide to attract attention. In the autumn of 1994, the site had its first million-hit day, when almost 100,000 unique users used Yahoo as a first step to get wherever it was they wanted to go online.

In March the following year, they incorporated the business and went venture capital shopping in Silicon Valley, securing nearly $2m from Sequoia Capital. When the floatation came two years later, the company still had less than 50 employees.

Through the late ’90s the company grew exponentially, thanks largely to a voracious appetite for acquisition. As internet start-ups were gobbled up left and right, Yahoo’s status as pre-eminent internet corporation seemed untouchable. But it is this approach, critics now say, that has created the patchwork dinosaur that Yahoo has become. The problem is one of identity. We may all know what Google and Facebook do, but what exactly does Yahoo do?

At the 2010 Web 2.0 conference in San Francisco, Carol Bartz answered the question this way: “We’re a tech company, we’re content, we’re media, we’re innovative.” Last year at the same conference, another top executive, Ross Levinsohn, said the company’s mission was “to take the power of technology and combine it with the emotion of content”.

Carol Bartz’s successor, Scott Thompson, was barely a week in the job last month when he made an attempt on the question during an earnings call: “Yahoo is both fundamentally a media company and a technology company. We need to be great at both.” Corporate mission statements are wishy-washy by nature, but all three of these formulations, far from articulating a coherent vision, indicate just how amorphous the company is.

Paul Graham ran a start-up, Viaweb, which was acquired by Yahoo in 1998. He says that when he went to work for the company, the seeds of its current malaise weren’t difficult to spot. It’s primary problem, as he saw it, was that the company was no longer centred on programming talent. By the time he arrived, ‘search’ was just one small part of the business.

The company’s acquisitions had brought a broad range of content into the mix, which drew huge volumes of traffic across the firm’s websites. In those days, this traffic was monetised in a singularly unsophisticated way; banner ads. Graham maintains that because this business model garnered huge revenues for the company, there was little point in investing in programming talent — in industry slang ‘hackers’.

As traditional companies scrambled to establish an internet dimension, they were willing to pay handsomely for what at the time looked like high grade visibility online. Through the acquisitive nineties, Yahoo diversified from search alone, incorporating a web portal and building a range of specialist content, but as other companies developed more finely honed marketing tools and the big money deserted banners, Yahoo didn’t have any response.

“Yahoo never had enough of a hacker culture.” Says Graham. “They thought they didn’t need to, because they were in the content business. But as Facebook has shown, it works to have a hacker culture even if your product is not overtly technical.”

Graham believes that Facebook’s commitment to a ‘hacker-centric’ culture has been instrumental in its success. He says that in the early days of Facebook, CEO Mark Zuckerberg hired programmers to fill even non-technie roles like HR and marketing. By the late nineties, Graham says that even those working within Yahoo were using Google for search, and by the year 2000, Yahoo established a deal with Google to power its search engine.

Yahoo’s dot com bubble experiences were as wild as everyone else’s, but at least the company survived. The stock doubled in price in the last month of 1999, and reached an all time high of $118.75 a share on Jan 3 2000. Less than two years later it bottomed out at $4.05.

In 2004, four years after it began using Google for search results, Yahoo launched its own web crawling algorithm and ended the dependency on its biggest rival. Acknowledging too that the company’s tools needed investment, Yahoo revamped its mail service to compete with Google’s Gmail. But as more ad money came pouring into the internet, Yahoo struggled to capitalise. It continued to lag internet search leader Google, while the meteoric rise of Facebook seemed to push the ageing giant further behind the curve.

Rob Enderle of the Enderle Group is one of the leading tech commentators in the world. He points out that Yahoo started out like a lot of companies, not knowing what it was building. “As a result the company tended to be unfocused and that lack of focus led to a lot of things that chewed up resources they couldn’t do well, like web TV and search, and some things, like social networking, they could do well but left underfunded.”

Yahoo began its social networking misadventure as early as 2005 with Yahoo 360°. Users could create profiles and personal websites, share photos and maintain blogs. But the service was never actually launched and all development ceased three years later. Next came Yahoo’s attempt to buy Facebook.

It was 2006 and Mark Zuckerberg’s company was second only to Myspace as the biggest online social network. Yahoo reportedly offered $900m. Zuckerberg said no. Yahoo’s response, instead of developing Yahoo 360°, was to start from scratch with Mash, which differentiated itself from other social networks by allowing users to edit their friends’ profiles.

But for reasons that have never been clear, the whole thing foundered, and Mash was also shut in 2008. Two years later, Facebook surpassed Yahoo to become the second most popular website in the US. No prizes for guessing who was number one.

Failing to engage properly with social networking has, say commentators, been Yahoo’s cardinal sin. “I think the train has left the station in terms of there being another primary social networking company out there,” says Dan Olds of tech research company, Gabriel Consulting. “We have Facebook, we have Twitter. There’s a myriad of smaller ones, but in terms of starting out with a new version of Facebook? That train has left the station.”

It wasn’t the only train to pull out without Yahoo on board. Early in 2008, the same year both social networking experiments died away, Microsoft offered $44.6bn for the company. The board said no, on the grounds that the bid substantially undervalued Yahoo. Four years later, with a market capitalisation less than half that figure, many shareholders must be wondering if the board’s decision was the right one.

In fact, another of Bartz’s contentions is that she was shafted because the board continue to labour in the shadow of that decision. In an interview last year, Microsoft CEO Steve Ballmer said that he considered himself lucky that the deal had failed. Given that the negotiations foundered just months before the Lehmann Brothers’ collapse and the global meltdown that precipitated, small wonder there’s relief on one side and self-kicking on the other.

In the months following the failed bid, Yahoo and Microsoft began putting together a partnership deal aimed at challenging Google’s dominance in search. At the time, Google hogged 65% of all internet searches. Under the terms of the deal, Yahoo and Bing (Microsoft’s search engine) keep their own branding, but search results on Yahoo now say ‘powered by Bing’.

In return for its technology, Microsoft gets 12% of Yahoo’s ad revenues in an arrangement which is contracted to last for 10 years. Though the Yahoo share price plummeted by 12% on the news of the deal, consensus is divided over whether or not the arrangement is good or bad for Yahoo.

Dan Olds at Gabriel Consulting comes down on the optimistic side. “I think it was actually a good deal. The two of them together pose a greater challenge to Google than going it alone.” If there is a win in there, it’s going to be a long-term one. In the short term, the deal hits revenues, while Yahoo’s display advertising, which has long been the company’s strong suit, is also declining.

The Microsoft deal was one half of Bartz’s revival strategy. The other was more conventional. Slash budgets, cut staff and sell anything that could be sold.

In late 2010, the community news site Buzz and the search engine Alta Vista were sold off. Yahoo reduced its blog content and unloaded bookmarking site Delicious to YouTube founders Chad Hurley and Steve Chen.

But as Bartz found out last September, it wasn’t enough. The big question — what next? — tends to centre on two options. Package the company for sale or pick up where Bartz left off and continue to try to turn the dinosaur around. Commentators say that the appointment of Scott Thompson, former head of PayPal as CEO last month signals an intention to keep on keeping on.

Rob Enderle points out that his online banking background does offer a nice fit with Yahoo’s shopping, automotive and finance content. Though Thompson has yet to vocalise anything approaching a new vision for the company, Enderle says it’s early days yet.

“You expect a vision statement at the end of the first full quarter or half; I’m a fan of doing this right the first time. He is just getting settled and a best practice is to wait until you understand where the company’s true strengths and weaknesses are before issuing a statement like that.”

Interestingly, Thompson had barely taken over Bartz’s corner office when co-founder Jerry Yang announced his departure. “The time has come for me to pursue other interests outside of Yahoo,” said Yang in a press release.

Though he had been popular among Yahoo employees, shareholders were less enamoured. Once again, that decision to turn down Microsoft’s offer of $33 a share back in 2008 is going to be difficult to forget as long as the share price remains below that threshold. At the time of writing, it’s $15.78, and hasn’t been anywhere near €33 in over four years. When it was announced that Yang would leave, the stock jumped by 3%.

“I think personally that Yang has seen the writing on the wall,” says Dan Olds, “I think he did the right and ‘noble’ thing. This company is going to have to change a lot to thrive and survive and with a founder sitting at the board, where this is his baby, where he has a vision of the company, it’s damn hard to enter into certain topics of conversation. It’s not necessarily that he’s going to scotch things but he might. With Yang gone, it sends a signal to investors and everyone else that everything is on the table.”

One name that crops up with increasing frequency in any discussion of Yahoo’s future is AOL. AOL was the first of the great internet powerhouses to lose its way. It was the biggest internet service provider of them all, with more than 30 million subscribers across the globe.

When AOL and Time Warner merged in January 2000, it was the biggest merger the world had ever seen, worth some $226bn. But it would also turn out to be the worst. The two organisations completely failed to engage in any meaningful way. Even without the explosion of the dot com bubble, comic mismanagement at AOL Time Warner left it with some of the largest losses in US corporate history.

AOL also screwed up its social networking dimension, buying Bebo in 2008 for $850m, only to sell it two years later for, it was reported, less than $10m.

AOL’s spectacular failure to marry content and technology is the ghost that haunts all of those woolly mission statements from Yahoo.

“I think Yahoo came closest to doing what AOL wanted to do,” says Dan Olds. “Which is to create a portal that’s sticky, but what happened with AOL is the web just moved beyond it. Yahoo does have some compelling content — they do a pretty decent job of sport for example — but they need a way to monetise all those eyes that they see, coupled with more compelling content, whether it’s tools or whatever. They can’t go out and be Facebook now.”

Finally this week, Roy Bostock and three other directors announced their decision to depart the company. With so much of the old guard now gone, and against a backdrop of ongoing shareholder unhappiness, there was an air of inevitability about Bostock’s exit.

But as Olds and others are quick to point out, this is still a very substantial organisation. Yes there are identity issues, yes Google and Facebook are taking an increasing slice of its display advertising, yes revenues are falling, but Yahoo is still profitable and has a worldwide audience of 700 million people.

“Yahoo continues to be a highly valuable property,” says Roger Kay at Endpoint, “with the most trafficked front page on the internet. It is the last of the great portals in an era when no one goes through the front door anymore.”

Does anybody, he asks, know what Wikipedia’s front page looks like? Search has changed the way we use portals. We bypass home pages and go straight to the information we’re looking for.

Yahoo has now announced that its Asian assets are for sale, a move believed to form part of a strategy to return to the acquisitions trail. “At one time Yahoo ruled the web world,” says Dan Olds, adding that hindsight is better than 20/20. “You could not have anticipated all the change we’ve seen.”

Don’t go writing Yahoo’s obituary yet.