Yahoo: Time for a Shake-Up

It was clever of Yahoo to announce the initial Panama roll-out on an otherwise depressing conference call (a well-handled subterfuge that, for a few minutes, distracted people), and it was also a relief to hear Terry finally acknowledge that the company's performance has been weak instead of trying to protest that 19% growth is fantastic relative to all other media.  This said, Yahoo!'s problems are deeper than a bad quarter caused by weakness in a few customers' businesses.

Yahoo! has lost the competitive fire that made it a powerhouse in the late 90s, and it has even lost the recovery momentum it developed in the early years after the crash.  Some of this is the result of a maturation of its core business--graphical advertising--but more is due to the lack of a sense of competitive urgency.  From the outside, it seems as though Yahoo!'s senior managers, having rescued the company from a brush with death, have collectively decided that they've done enough and that just being "good" is now good enough.  (A less charitable interpretation, one I've floated before, would be that the company got fat, happy, and lazy.)  Unfortunately, Yahoo is now competing against companies for whom being good isn't enough (Google) as well as against old media giants that are thrilled to finally be playing in the Internet big leagues (Newscorp).  And these companies are kicking Yahoo!'s ass.

I am hesitant to point fingers without knowing more details, but it seems to me that Yahoo!'s lack of urgency starts at the top.  It's not just that Terry often sounds as though he is delivering the quarterly conference call from a Barca-lounger (although if he speaks with this much urgency and passion when trying to rally the Yahoo troops, it's no wonder the company has hit the snooze button).  It is that, despite the incessant delays in the new ad-serving system, despite the loss of market share to Google in almost every key product area, despite having to be embarrassed into action in Finance and email, despite an inability to compete for major acquisitions (YouTube), despite the inability to articulate a clear, overarching strategy, Terry appears to have made little or no effort to scare his team into shape.  Given the company's stumbles this year--a year in which it has gone from being No. 1 to an increasingly distant and feckless No. 2--one imagines that at least a couple of heads should have rolled.

Yahoo is still brimming with talent--Terry, Sue Decker, Dan Rosensweig, and others--and its global brand and franchise remain the envy of every media company in the world.  The company has clearly lost its edge, however, and if it doesn't regain it soon, the latter asset will simply wither away.  If Terry doesn't want to grab Yahoo's people by the lapels and make them desperate to win again, then he should step aside and let someone else do it.  And if he wants to, but can't, then Jerry and the other remaining folks who once had the fire should ask him to go.

Comments

[vic]

First MF's

[vic]

Henry, it seems as if Semel already lost the company. There was rumored "booing" from a crowd of employees this past week when Semel tried to lead a rally cry against Google. It just seems easier to me to call the investment bankers and try and get $30 per share. Also, yesterday's attempt to hype up Panama by saying it is now live only to later retract in the call and say the front end only was live was an awful desperate act. This guy has to go.

[Bruce Hamm]

Henry, do you think a Microsoft acquisition of Yahoo - which would bring leadership scale on almost
every level and service (even with the complexities inherent in such combination) is the best chance that
both firms have of organizing resources to compete with Google, especially when it comes to advertiser
and advertising spend concentration which is what Google uses to further their lead via syndication?

The combination would, especially in the display market, be an absolute must buy for every advertiser and
across their major verticals - from health to sports to finance to autos - they would be number one from
a rolled-up audience perspective (even as they keep their own brands and audiences)and for advertisers
that need to reach large audiences in one buy. They would also have the footprint via their combined client
distribution to build a robust behavioral marketing businesses that would improve content delivery and
raise CPMs over time.

With all the attractive high growth audience acquisitions done for the next 12 months (except for
Facebook), isn't large scale M&A the only true option left to provide another center of gravity in
the Internet media market and build a compelling growth story which both companies need?

[Victor]

(I'm not Vic btw).
Henry, finally someone has put it stark, unequivocal terms. Thankyou.

Yahoo is in deep trouble and management there is making all sorts of stupid decisions. For instance they instated forced CHristmas vacation, which I know for a fact was a huge blow to morale at the company. They've really lost their sense of direction and something will need to change soon if they are not to fade into irrelevance by degrees.

[Victor]

Does anyone else find Mr Semel's announcment of the roll-out of Panama on the exact day of earnings a little suspicious? THat they began signing up advertisers to the new system exactly when they were going to report terrible earnings? I wonder if the "launch" was really just a spectre of a real launch, and Semel really felt like he needed something to show to not have their stock get beaten into oblivion.

[ZF]

Semel's problem is twofold:

(a) He has no concept of what he's supposed to be doing, other than keeping Google's tail lights in sight

(b) He's failing very visibly at that.

To be fair to him, the reason he was brought in was precisely because the company had no more idea than he does now where it should be headed.

[JJ]

It's very possible that hollywood types (and probably mba types) expect minimal change in tech companies/industries; but the problem is that tech is about constant change (ex. moore's law); therefore, it is imperative for "leading" tech companies to constantly recruit/motivate A/A+ caliber engineers in order to maintain their edge against the competition. However, would A/A+ engineers fight hard for Yahoo/Semel? ... so that Semel gets an extra $100M in options? What do the high performing engineers get - slap on their back or a smile? The most logical and best alternative for top notch engineers is to join either startups with large potential payouts or maybe ... goog - who treats their engineers very well (founders' award and those perks). Make sense, folks? Which great technology or tech companies were NOT built by great engineers?

[Victor]

Hey Henry, you were mentioned in the Economist again on their article on the GooTube merger.

You're gunna have to tell us more about this Cherry Hill Research thing:
http://www.cherryhillresearch.com/about/foundersnote.html

[strawberry]

As a former Yahoo! engineer, I totally agreed with ZF's point. Why would great engineers want to work for Yahoo!? There's no glory as Google, you got paid 1/1,000,000 of the CEO's salary and who the fuck are those high-paying media executives hired by Semel? With the same money, you can hire at least 20 very good engineers who can spot the trends of ad technology and started the revamp soon after overture got acquired, not 2 years afterwards. I wished I had sold my YHOO shares earlier.

[Chris Fischer]

Agreed with all the posts.. I've been bearish on yahoo even before Google REALLY started eating their lunch.
And is anyone really surprised that Semel isn't motivated after the what, $500 million in options he's cashed in within the last year??

[Andy]

It's easy to dump on Semel right now, as YHOO is clearly having some trouble keeping up with GOOG. But a few things to keep in mind:

1) YHOO has been able to maintain search share in a very competitive marketplace.

2) Semel has done two of the three best acquisitions in Internet history -- Inktomi and Overture (with PayPal being the 3rd -- verdict still out on MySpace)

3) Because the above acquisitions were done just three years ago, YHOO in its current incarnation is a younger company than GOOG. Semel first had to fix Inktomi, the search algorithm. Then he had to fix Overture, and that is Panama. It turns out these things are rocket science, and that it does take a lot of work to fix them. These efforts have distracted YHOO from other things, which they can now focus more on.

4) YHOO does have the only Asia strategy that is working for a US internet co(GOOG and EBAY are failing miserably there).

5) YHOO does have the most monetizable content on the web, and CPMs are still dramatically below those of traditional media, despite the advertising being more measurable and more effective.

Yes, YHOO could be doing more, and Semel admitted it. His focus list seems well placed: social media, video and mobile. These are some of the most attractive places to be in media for the next five to ten years, and YHOO is well positioned to benefit from them.

So go ahead and dump all over Seme. It's easy to do, and it's certainly conventional to do (just listen to Cramer). He is "the man in the arena", and I suspect he'll come through. In time.

[JC]

The only thing I'll say about Semel is that he's cashed out over 500 million in options in the past 5 years while the investor base has suffered. Maybe it's time for a new beginning.

[David]

Things seem so bad at Yahoo! that it's hard to believe they are actually that bad. Internet advertising (and PPC specifically) is still a hyper growth area which means it's very volitaile. I think Yahoo! was taken by surprise this year and it's a joke that its taken this long to revamp Overture. There's definitely enough blame to go around, but I'm guessing they make changes, learn from their mistakes and better manage this growth in the future.

Semel can somemtimes be frustrating and Yahoo!'s Hollywood intentions are still unclear, but it was only a year ago when his reign was considered very successful. I think he gets at least 2007 to remedy the situation.

I'm buying shares at these levels and expecting things to be much better a year from now.

[JC]

I think we'll collectively learn whether Yahoo's problems are company specific or indicative of an industry wide slowdown after Google reports its numbers tomorrow. Google stumbled in Q4, 2005, sighting weakness in Europe during the holiday season (or you could argue that they didn't stumble but were tripped up by a higher tax rate) , while Yahoo also disappointed the street with an in-line quarter. What that says is that market share gains alone can only take you so far and that Google isn't immuned to a slowdown in online ad spend (or in google's case, there weren't enough people in front of the computer clicking on its ads). But if Google manages to wow the street tomorrow.... again, further strutting its dominance and confirming that the sector's robust secular growth is intact, the top dogs over at Yahoo better stop resting on their laurels.

[JC]

http://media.seekingalpha.com/article/18733

Commentary from Dow Jones executives regarding its online ad business and its possible impact on Yahoo.

[Anders Kargaard Jensen]

I sold my Yahoo! shares last year at $43 and has been long with Google Calls since April 2005. It has been good to me..

Henry - I am glad to finally see you drop that foolish ever lovin Yahoo! attitude you had for too long. Yahoo! has been.. Google is and will be for some time.. the fastes growing profit machine in the world..

Great blog - great comments from a lot of people!

[ishui]

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[Royal]

Does anyone know exactly how much has Semel made in the last few years?

Does anyone know if he's planning to re-juice himself again this year?

[jane]

I don't agree with Chris Fisher on point 2).
The yahoo panama project is essentially to rewrite the whole search ad system, which indicated buying overture is totally pointless. What should have had happened is yahoo built their own search ad platform in 2003 while licening Google or Overture's sponsored search. Advertisers are not very sticky. They will switch to whatever platform which yields better ROI. Yahoo should have built their own system than buying overture for 1.x billion and later trashed the whole thing. Semel should actually take the blame!