Analysis: The Market is Telling Yahoo to Stop Making Excuses and Act

Authored by Jay Baage on December 6, 2006 - 3:09pm.

Tuesday night Yahoo kicked out both Chief Operating Officer Dan Rosensweig and media group head Lloyd Braun in an attempt to reorganize management for the next era of the Internet and focus the company on catching up with Google. But after missing opportunites in social networking media and video, the market does not have much confidence in CEO Terry Semel’s ability to lead Yahoo in the Web 2.0 era. So what needs to be done to turn Yahoo around?

In a blog post, Terry Semel reflects over when he came to Yahoo five years ago, when it was a place “with incredible assets (huge audience, strong brand, healthy balance sheet), great potential, and a team filled with determination and a fighting spirit. But the company faced challenging economic conditions that pummeled the Internet sector and was itself losing money.”

Since then, we know what happened. Semel blaims “challenging economic conditions” on why Yahoo ran into trouble. He might perhaps have had a better chance to get away with that excuse, were it not for the company’s main competitor making it embarrassingly obvious that this was not the case.

Google has under the leadership of CEO Eric Schmidt successfully managed to focus on monetizing its innovative search technology, stealing away a large chunk of both traditional and Internet advertising cake, while Yahoo, under CEO Terry Semel, drifted off in too many different directions and got left with a few crumbles of the advertising cake in many separate areas.

The graph below reflects the stock market’s assessment of the two companies prospects since Google went public. Google's stock performance is represented by the top line and Yahoo's by the bottom:

Yahoo vs. Google Since Google's IPO to Dec. 2006

Yahoo’s problems are outlined in the infamously leaked peanut butter manifesto from one of the company’s executives. It basically stated that at the root of the economic and strategic problems is a lack of focus. The company was trying to do too many things at once, hence figuratively spreading out as a thin layer of peanut butter, instead of concentrating on growing a few key areas.

“Now, I know what you’re thinking — this is all about peanut butter. Actually, we’ve been orchestrating this plan for a number of months as we envisioned the next phase of growth for the Internet. Following our third quarter results, I very openly discussed that we were going to become more focused and bring about change. But let me stress that we’re organizing the company for growth and are continuing to hire great talent”, says Terry Semel.

Well, what strikes me as odd is that Semel has not addressed the peanut butter problem earlier than just a few months ago.

Semel notes himself that when he came in five years ago the company had a “huge audience, strong brand, healthy balance sheet” and morale was great. What it needed back then was to figure out how to grow its traffic through experimenting with a number of new applications, learn how to better monetize all its traffic, and, finally, to identify a few key areas to focus on.

Semel was no doubt very successful in growing Yahoo’s traffic. With all that traffic, Yahoo could have set its mark on social networking media and video. Instead, other leading companies in those areas emerged, such as MySpace and YouTube, and were acquired by rivals. Fast forward five years after Semel came onboard and Yahoo is still in an identity crisis and people are growing frustrated. Inside Yahoo there are increasing reports of departures, low morale and internal complaints of a growing bureaucracy has taken a front seat. Outside, what investors and potential partners think is reflected in the company's stock price.

The market also put its mark of disapproval of Yahoo’s announcement of its latest move, the biggest management shakeup in more than five years, by dropping the stock price on Wednesday. Maybe just because the company did not shake up the actual top job. Chief Financial Officer Susan Decker was put in charge of ad sales in a move that positions her as successor to the company's top job, but Semel stays on for the time being.

The market does not like uncertainty and right now the most important strategic positions, a future CEO and head of Yahoo Media Group, are up in the air. Perhaps the combination of Susan Decker as new CEO and possibly Vince Broady as new head of Yahoo Media Group would clear some of the smoke away.

Sure, Yahoo is addressing their current challenges and will be in a better position to identify and act with more focus on the next big growth opportunity on the Internet.

But action speaks louder than words. Yahoo needs to show the world that it can amaze us by making our lives easier and better by fully embracing some new Web 2.0 feature that blows away anything else that is out there. What’s more, it needs to show investors that they know how to monetize that new feature, otherwise, what’s the point? Google will move in with its war chest of cash, throw its weight around and that will be the end of that.

Joakim Baage