Thursday, 20 November 2008

What went wrong with Yahoo!

Jerry Yang, co-founder of Yahoo has announced his decision to step down from his position as chief executive officer as soon as a replacement has been appointed.

Yang's departure comes after less than 18 months at the helm. Over the past few months, Yang drew intense criticism from shareholders for failing to agree an acquisition by Microsoft early this year.

Since then, Yahoo's fortunes have continued to deteriorate. A planned search deal with Google, its best hope of getting a quick boost, fell apart after regulators objected, and the company's shares have slumped as its core display advertising market has deteriorated.

So, where did Yahoo actually go wrong?

First mover, but not the leader
But many of its firsts have not panned out -- Yahoo was early among major companies to seize on the social network trend popularised by MySpace and Facebook, in which Web users share messages, photos and videos with select friends. But it remained too wedded to a decade-old idea of being a one-stop Web portal to embrace the new wave.

Promised changes, from new Web search advertising technology to do battle with rival Google Inc to the hiring of Yahoo co-founder Jerry Yang as CEO, have failed to yield any promising changes.

Missed opportunities
Yahoo is struggling with the legacy of former chief Terry Semel, who from 2001 to mid-2007 led its resurrection from the dotcom crash and diversified it successfully into advertising. But a push into entertainment was far less successful.

"Yahoo was backed into a corner because they passed up compelling acquisitions," according to an analyst. The company had an opportunity to buy Google and didn't. It could have bought Facebook for less than a couple billion dollars and didn't said the analyst referring to two of Yahoo's biggest rivals.

No Panama
In a letter to Yahoo's board, Microsoft CEO Steve Ballmer said Semel had rebuffed him a year ago when he sought to hold talks to merge, citing confidence in Yahoo's "potential upside" from planned reforms and a new advertising service, dubbed Panama, to challenge Google in the increasingly important Web search and pay-per-click advertising markets.

"A year has gone by, and the competitive situation has not improved," Ballmer wrote to Yahoo's board in February. Under Semel, managing at Sunnyvale, California-based Yahoo became ever more unwieldy as major operations, each with its own industry culture, grew up in Silicon Valley, New York, Los Angeles and in a variety of joint venture operations in Asia.

Failed manifesto
A leaked Yahoo internal memo in November 2006 called for a dramatic organisational shake-up and layoffs of up to 20 per cent of the workforce to restore competitiveness.

Known as the "Peanut Butter Manifesto," the memo argued that Yahoo was spreading organisational resources too thinly. "I hate peanut butter," memo author Brad Garlinghouse wrote.

Repeated product delays, business restructurings and executive defections, including former Chief Operating Officer Dan Rosensweig and research head Zod Nazen, led Semel himself to resign as CEO in June, when he was replaced by Yang.

Microsoft merger: Cost refusal?
In early February, Microsoft publicly announced $44.6 billion cash-and-stock offer to acquire Yahoo. Yahoo's stock surged from a close of $19.18 the day before the offer was made public to close at $28.38.

However, almost ten days later on February 11, Yahoo rejected Microsoft's offer, saying "Microsoft's proposal substantially undervalues Yahoo."

In April, Microsoft sets an ultimatum for a Yahoo response, threatening to take the matter directly to Yahoo shareholders. In May, discussions finally break down. Microsoft announces that it's really not interested in Yahoo.

Yahoo's market value has dropped by more than $20 billion since Yang took over as CEO in June 2007 as discussions with Microsoft ended in failure. Microsoft bid as much as $33 a share for Yahoo this year, and Yahoo now trades at a less than a third of that value.

However, with Yang gone, analysts are speculating that Microsoft may come back.

'Google dump'
Failed merger talks with Microsoft were followed by derailing of an ad partnership with Google Inc and stalling of talks with Time Warner Inc's AOL.

Google abandoned an agreement to sell ads alongside Yahoo's search results recently after US regulators threatened a lawsuit to block the partnership, saying it would give Google too much power.

Need to reinvent
"Yahoo needs to reinvent the 'cool factor.' (But) you can't just do that because you want to," said an analyst about Yahoo. He added that the same also holds true for Microsoft: "(It) can't hold a board meeting and tell people to go back to their desks and start acting cool."