Silicon Insider: Yahoo -- A Company in Crisis

Jan. 25, 2008 — -- There's no Yahoo! for Yahoo! these days.

The online giant, which has already survived one of the greatest melt-downs in high tech history and come roaring back, now once again appears to be looking down into the abyss.

The company's stock is plummeting -- down nearly 30 percent since the summer, when the company booted long-time CEO Terry Semel. The company is bleeding market share to arch-rival Google -- down 6 percent from a year ago (everyone in the search field is losing to Google, but none as fast as Yahoo). And when the company announces its fourth quarter financials Tuesday, they are expected to be bleak indeed, and it is widely assumed that they will be accompanied by lay-offs -- several hundred according to some sources, up 2,500 according to stock analyst Henry Blodget.

Meanwhile, Wired.com is predicting that the co-founder and current interim CEO Jerry Yang will likely soon get shoved out of the execs chair to be replaced by long-time CFO and current president Susan Decker. In other words, Yahoo is looking like a company slowing spinning down into disaster.

Needless to say, this is not a good time to be in trouble. Healthy companies get dragged kicking and screaming into recessions, they have war chests set aside full of money to fund R&D during the slow times, they manage their lay-offs instead of being managed by them, and they position themselves to come powering out of the downturn ahead of their competitors gobbling up market share as they go.

Right now, if Yahoo has anything going for it, it is that some of its current crisis is being camouflaged by the general economic slide, especially in advertising. Moreover, as I suggested recently, Google, whose own stock is also slipping from its nosebleed heights, is heading for its own fall -- driven not by a failure of the business model, but a growing internal character crisis -- and Google's decline may perversely buoy Yahoo's fortunes.

Finally, if this recession proves deep enough and sufficiently protracted -- and pray it doesn't -- Yahoo could also be a beneficiary of a widespread shift by consumers away from expensive entertainment like movies and towards comparatively cheap experiences on the Web.

But that's all grabbing at straws. The simple fact is that Yahoo is a company in crisis -- made all the more astonishing because it has been in such a crisis once before (during the dot com crash) and you might think that it would have the experience, the tools and wisdom -- not to mention the preparation -- to handle this.

Equally astonishing is that Yahoo is still a giant company -- its site has more than 130 million unique page views per month and more than 3 billion page views per day; meaning that it is still one of the most active sites on the entire Internet. Indeed, unlike almost any other company, save Google, those 3 billion page daily views actually represent a significant percentage of the web's entire daily traffic.

That is a serious footprint, made even more impressive by the fact that most of Yahoo's traffic is composed of people who are not transients (like the typical Google user) who are just passing through on the way to some other site, but actual Yahoo subscribers. This puts Yahoo in the class of Facebook and MySpace and the other big Web 2.0 community sites in terms of sheer numbers of subscribers.

So, given all of that, what has gone wrong at Yahoo? (Or, more properly: Yahoo!? Which is the first time in my writing career I've ever put a question mark after an exclamation.)

I think there are two explanations: the wrong business model and the wrong management. Ironically, the product, which will get most of the blame, is only part of the problem as it relates to the other two.

Let's look at the business model first. Yahoo is an anomaly in the web world. Like AOL, it is a survivor of a different Internet era: the early 1990s, when the web was fairly barren of interesting content and a handful of companies sprung up to create self-contained experiences for subscriber/users. Most of those firms are long gone; and of those that survived, did so because of the unique capacity of e-mail accounts to keep users committed almost forever. Yahoo's strategy, brilliant for the time, was take this body of e-mail users and not only grow them, but to keep providing them with more and more services so that they never left the Yahoo web space.

A few years ago, when I wrote a story about Yahoo for Wired Magazine, I likened this business model to creating a kind of Disneyland -- Yahoo's goal was to keep you so entertained and engaged in everything from sports to chat to user groups to news that you never had any desire to leave its Magic Kingdom. That Yahoo became the de facto equivalent of the entire Internet for its users. And thus nobody would even notice, much less complain, when all of the drawbridges were lifted, trapping them inside.

I had serious doubts about that business model then, and even more now. Yahoo's biggest problem here was that the web didn't stay barren -- on the contrary, over the last two decades it has filled up with some much interesting stuff that no single person can keep up with it any more; it has essentially become an alternative reality enjoying almost as much complexity as the natural world.

Yahoo's dilemma then is: how do you keep those millions of users focused on your content when there is so much more excitement just beyond the wall? More importantly, how do you convince those millions to upgrade from what are essentially free services at Yahoo to the more expensive (and profit-making) experiences, when the same stuff is free elsewhere on the Web?

The answer is that you have to create proprietary experiences so supremely interesting and compelling -- services you can't find anywhere else -- that your users will turn their attention back to you. This was where Yahoo was going three years ago.

Ex-CEO and former movie producer Terry Semel seemed poised to be the first guy to sign up Hollywood for on-line delivery. It was generally assumed that he would use his movie industry connections to convince the major studios to deliver first run movies -- at premiere -- over Yahoo for a reasonable price.

Had he pulled that off, Yahoo would not be in the predicament it is in today. But something happened -- even after Yahoo opened operations in the Southland, the direct feed movie fantasy evaporated, only to slowly emerge through services such as YouTube and Apple iMovies. It was the home run that Yahoo whiffed, and it will probably be years before we know the whole story.

Movies were only one possibility, though probably the biggest. Had Yahoo come up with even one unique killer offering during the last five years, it might be leading the industry right now, rather than trailing it. Instead, it has seemed to spend most of the current boom living off of its sizable, but increasingly bored and frustrated army of users. This is not a way to run a company.

And that brings us to management. By becoming complacent, risk averse and conservative, Yahoo's management has done the company's shareholders, employees and users a huge disservice. Compared to Google's 'set up, a free service on the side of the freeway' business model, Yahoo's magic kingdom model is wrong-headed and antiquated. But it will still work if the company only fulfilled its side of the social contract it has created with its users -- i.e., you stay loyal to Yahoo and Yahoo will provide you with services and experiences non-users will envy. That's what Apple does. But Yahoo reneged on that contract three years ago, it has let other companies set the pace for innovation … and though millions of Yahoo users still remain and still want to remain loyal to the company, Yahoo has returned that loyalty and commitment with a kind of passive betrayal.

Tad's Tab

Half Match.com and half hotornot.com, and all quirky, Iminlikewithyou.com is a dating Web site run like a popularity contest. First if you find a profile you like, then you submit a bid, and before you can even contact that person, you need to 'win' them in the resulting bid auction. There's also a strategy here, because sending too many bids will limit your options; while not sending any will leave you friendless. Iminlikewithyou.com is a fun and interesting take on the otherwise stale online dating "game.

This work is the opinion of the columnist, and in no way reflects the opinion of ABC News.

Michael S. Malone is one of the nation's best-known technology writers. He has covered Silicon Valley and high-tech for more than 25 years, beginning with the San Jose Mercury News, as the nation's first daily high-tech reporter. His articles and editorials have appeared in such publications as The Wall Street Journal, the Economist and Fortune, and for two years he was a columnist for The New York Times. He was editor of Forbes ASAP, the world's largest-circulation business-tech magazine, at the height of the dot-com boom. Malone is the author or co-author of a dozen books, notably the best-selling "Virtual Corporation." Malone has also hosted three public television interview series, and most recently co-produced the celebrated PBS miniseries on social entrepreneurs, "The New Heroes." He has been the ABCNEWS.com Silicon Insider columnist since 2000.