Can Jerry Yang fix Yahoo?
Imagine this: a company has a $35 billion market cap, a P/E of 50, annual revenues of $5 billion, annual profits of $500 million, 60% gross margins, and about $3 billion in the bank.
Nice fundamentals, right? Now imagine the same company being characterized as "embattled." What could possibly be so wrong with this picture that an outcry from investors got the CEO booted?
The company in question, of course, is Yahoo. And what's wrong is that archrival Google has figured out how to mint money with search ads and now boasts a market cap of $170 billion and $3 billion in annual profits. The bad news for Yahoo is that advertising, for the most part, is a zero-sum game. Google's good fortunes spell boohoo for Yahoo.
It doesn't help that, in 1998, Chief Yahoo and co-founder David Filo encouraged Google's founders to start a search-engine company. Or that, in 2002, Yahoo had a chance to buy Google for $5 billion and passed.
The irony of those missed opportunities isn't lost on anyone; every Yahoo employee and shareholder has felt its demoralizing effects, not to mention Yahoo's deteriorating share price. All it took was a whopping $71 million executive pay package for CEO Terry Semel to put investors over the edge.
Less than a week after the company's annual shareholder meeting, Semel was out and Chief Yahoo and co-founder Jerry Yang was in. Until then, Yahoo had employed seasoned executives at the top--first Tim "TK" Koogle and later Semel. Still, founders Filo and Yang have remained actively involved in the company's evolving business strategy and technology.
But Jerry Yang as a turnaround CEO? I admit--I didn't see that coming.
The other thing I didn't see coming was the board reacting so quickly without, to my knowledge, a search for outside candidates. And it's not at all clear whether the board had time to conduct an objective review of the company's competitive position and what leadership skills might be needed for a successful turnaround.
On the other hand, it's all too easy to become internally focused and lose perspective when you're under that much pressure. And the board--as solid a board as I've ever seen--was under considerable pressure.
To be sure, Yang is a visionary--a brilliant, innovative and accomplished man. But is that what the company needs right now? Does Yahoo suffer from lack of vision? The problem is search advertising. It's not clear that Yahoo's missteps in that area were caused by anything but missed opportunities and failed execution.
Here's my primary concern, in a nutshell. With the company confronting the most daunting of competitive challenges in a mind-bogglingly fast-paced industry; with $35 billion of market cap and thousands of employees at stake; with half a billion users and an entire ecosystem on the line; is it prudent to bring in someone who has never run a company before?
Now, before some of you Yahoos out there flame me, remember that I'm trying to be objective about this. After all, I'm a consultant; it's my job to be objective. And having competed with the likes of Intel, and having been involved with a turnaround or two, I can certainly empathize with the enormity of the task ahead of Yang. That's what's making me nervous.
Yes, Yang has Susan Decker at his side. But, impressive as Sue is, aside from running the company's advertising and publishing group for seven months, she's never run a company or a business either. Of course Yang and Decker are both extraordinarily competent senior managers with complementary skill sets. But the most seasoned, accomplished CEO would find the company's current situation to be extraordinarily challenging.
Now, don't get me wrong. Although Google is eating Yahoo's lunch in the most lucrative growth market, and reversing that trend will be slow and painstaking at best, the situation is far from unrecoverable. Yahoo has tremendous assets to leverage, going forward. Yahoo has more Internet users and knows them better than any other company on the planet. It has a broad range of services to offer all those eyeballs and wallets. It has a powerful brand. And it has a talented young executive management team, although retention will continue to be a challenge if the situation doesn't soon improve.
As for selling the company, first, I don't think the situation calls for it. The company has unique assets, a strong brand, and solid fundamentals. Second, even with its stock at current levels, it's still big and expensive. Third, I don't think an acquisition changes much; the buyer still gets saddled with the same competitive hurdles.
In my opinion, Yahoo is a workable, if not challenging, turnaround. And a successful turnaround requires three things: 1) objectivity--to accurately assess the situation, 2) experience--to determine the new strategy and plan, and 3) leadership--to sell it and execute. Smarts is a given.
In the case of Yahoo, I don't think the Yang-Decker combination meets those requirements. Yes, it was a bold, if unconventional, move. But it may prove to be too risky to either reverse the company's fortunes or to satisfy shareholders.
Steve Tobak is managing partner of Invisor Consulting LLC. He is a member of the CNET Blog Network, and is not an employee of CNET. Disclosure.
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Of all the things that draw people to Yahoo, I'd say the main one is search. We can take the approach that Yahoo has taken: we can't improve on search, so let's expand horizontally into finance, e-mail, Yahoo Groups, Yahoo Chat, making a better portal site, etc. However, the fact remains that at the end of the day more people need to search for things on the Internet, than any other activity.
Yahoo has long prided themselves on the fact that their search results are categorized and tweaked by humans. Their belief has been that this human touch gives them an edge. We can see now, because market numbers don't lie, just what kind of an edge this human touch has given them.
So how can they improve? Automate and innovate. Google's stock price is a million bucks per share right now not only because they don't seem to believe in stock splits, but also because their approach to selling advertising is novel and innovative. Their approach to webmail is novel and innovative. I could go on.
Being an "also-ran" in the search engine market (even if you were the first) won't get you anywhere. Tweaking and improving the internals helps, but only if it results in some tangible change for users. Yahoo could, for example, try to broaden their indexing operation -- put more 'bots to work indexing the Web. But how do you prove to your users that you have more web pages indexed than your rival? And what good does it do your users, if they can't possibly sift through all that data anyway?
Innovate. Categorization is not exactly an unknown word. And it doesn't have to be done solely by humans anymore - government contracts and the scientific community have seen to that. Automated summarization is not out of the realm of possibility either, thanks again to government R&D spending and the innovation of companies such as Cognisphere Inc.
If Yahoo adopts one or more of these technologies, their search results will be head and shoulders (and torso!) above everyone else's, including Google's, causing a shift in usage: people will flock to Yahoo as they did to Google.
One last thing: good gimmicks seem to work. Ask.com's gimmick is that you can ask questions (even though the technology behind this is non-existent or infantile -- they simply strip out the question words and perform a regular boolean search, from what I've seen). Google's gimmick is a simple homepage, no frills, no fuss. Yahoo's gimmick has been two-fold: they want to be our portal to the Internet, and they have humans behind the scenes, making search results better.
Personally, I think the search results through Yahoo are a bit more robust than through Google. I think Google's site focuses too much on increasing the number of sidebar ads on each page, thus increasing Google's revenue, but doing nothing for the quality of my search results. Maybe if Yahoo updated their gimmick, and pushed a bit harder to prove that the quality of their search results is better than everyone else's, they'd see an influx in searchers and a corresponding increase in advertising revenue.
Doesn't matter who is at the helm, as long as they have the vision that it takes to win by innovating, not by re-packaging stale ideas. Yang, as one of the founders of the company and inventors of its core technology, and as a scientist from esteemed Stanford University, has what it takes to drive this innovation. I'm glad the Board agrees with me.