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Maybe Yahoo Was Destined to Flounder

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carol_bartz_thumbCome Tuesday, Yahoo (s yhoo) will step up to deliver its most recently quarterly results, which I doubt will be very much fun. Still, it will be the first time recently appointed CEO Carol Bartz will have a chance to publicly address the most significant question facing the company: When is it finally going to take steps to turn things around?

Another milestone date lies a little further ahead: Feb. 1, the one-year anniversary of Microsoft’s (s msft) proposed acquisition of Yahoo, an event that set the Internet giant into a maelstrom of turmoil no company would ever willingly choose. But while Yahoo has made decisions that many view as wrong, were there ever any better alternatives?

yhoo-msft-post-bid2A purchase by Microsoft might have left shareholders a lot happier (though not all — Microsoft’s initial bid let investors take cash or Microsoft stock; Microsoft’s stock is down 47 percent since that bid, while Yahoo’s is down 41 percent. In retrospect, the smartest thing a Yahoo investor could have done is sell the stock near $30 a share in the wake of Microsoft’s offer).

As for Yahoo itself, it would be hard to imagine it flourishing inside Microsoft. The corporate cultures wouldn’t mix well. Microsoft’s ability to handle search has produced steady losses. And non-search initiatives may have languished in a company that was never interested in them to begin with.

What about the other options, like a merger with AOL? No one ever showed much confidence in this path (often likened to tying two bricks together). As for an alliance that would have seen Google’s (s goog) ads run alongside Yahoo’s? Leaving aside antitrust entanglements, the deal would have been no more than a short-term life-support system for Yahoo, one that would have failed to address the company’s real problems.

One of the deeply rooted reasons behind Yahoo’s rejection of Microsoft’s $44.5 billion offer was Silicon Valley’s antipathy toward the Redmond giant — a grudge that stretches back decades but that in this terrible economy seems almost anachronistic. The bully Microsoft that quashed many a promising startup was chastened long ago, and now finds itself struggling for a footing in the emerging world of cloud computing.

Where does that leave Yahoo? Independent, but a mere shadow of its former self, the company that as a kindly, handholding web portal (remember those?) ushered hundreds of millions of new people onto the Internet, established the way we check stocks and email on the web, and did more than anyone early on to woo the biggest non-tech brands into spending ad dollars online.

More recent, albeit smaller, successes like Flickr, Buzz and Answers demonstrate that such pioneering spirit is still alive in Yahoo, just caged inside a stifling bureaucratic culture. To right itself, Yahoo must make some tough choices. But looking back over the past year, it’s not clear that any of the alternatives open to it would have been much better than the ones it’s already made.

So maybe Yahoo was just destined to flounder. Facing dark times could force it into the kind of discipline that may return it to greatness. The problem with Yahoo has never been that it didn’t opt for this merger or that partnership, but that it lost the vital connection it once had to its users. Independent or not, if Yahoo wants to survive, it needs to reconnect with them.

Chart courtesy of Google Finance.

15 Responses to “Maybe Yahoo Was Destined to Flounder”

  1. Kevin Kelleher

    @Chad: Excellent points, thanks for making them. I would only add two things. First, in a lot of discussion about the Yahoo-Microsoft talks, there has been an assumption that Yahoo’s board tossed away a fortune for shareholders. It’s worth noting that even with that 60% premium it may not have been so wonderful for them had the deal gone through. Second, Microsoft is not only down more than standard benchmarks, it’s down more than Yahoo. Had the deal happened as quickly as Microsoft wanted, it’s quite possible people would be saying today that Yahoo made a mistake.

  2. First: reports of Yahoo’s demise are greatly exaggerated. It’s a solid company, but its growth has flatlined. That is a long way from dying, though. Second: it’s no mystery why Yahoo has flatlined. They have failed to introduce anything that people want enough to pay for it. Very simple! OK, Flickr Pro is worth it for some people, but that’s not a core offering. So, stop coasting on the portal, and offer a product that people will pay for. It sure isn’t the garbage known as Yahoo mail. The only Yahoo product worth getting excited about is Pipes… but it’s not user-friendly enough for mass adoption. Pipes could provide the plumbing for a very successful product, if they get the features and interface right.

  3. Kevin, your analysis of whether Yahoo’s stockholders would have been better off since Feb 1 2008 leaves out three significant facts. First, the Microsoft offer was at a 60%+ premium over Yahoo’s trading price at the time of the offer, so Yahoo stockholders would still have come out significantly ahead of where they stand now, even if Microsoft has declined 47 percent and Yahoo has declined 41 percent since then, which means Yahoo’s shareholders would have been much better off if Yahoo had accepted Microsoft’s offer compared to where they stand today. Second, the hostile offer from Microsoft came after Yahoo had dropped from 33 in late Oct 2007 to 19 on the day of the offer, which meant that it had already seen very dramatic declines, was likely already undervalued by the market, and therefore less likely to decline as much (relative to other stocks in the sector) in the wake of the subsequent US financial meltdown. Three, given that financial meltdown, its obvious in retrospect that the shareholder of almost any company would have been better off cashing out back in February rather than going through the steep decline the entire market has seen since then.

    Full Disclosure: I am a former Yahoo employee who is now a Microsoft employee (by way of an intervening stint at a startup that was acquired by Microsoft)

  4. I agree with you that Yahoo needs to connect with users further and instill greater discipline in terms of product development. Avoid coming out with products that appears – like short of a copycat – to what the start-ups are doing (and still a bit less of it in terms of features).

  5. It is funny that many people are commenting without any numbers to back their assertions. I have seen the numbers from Comscore and anybody who has seen those numbers can attest to the fact that those properties are growing faster than their peers and the whole market. For example Yahoo Answers has more unique users than flickr and has been growing like weed. Yahoo Mail added more users than almight gmail that many of you believe is the top used mail property on earth. Yes, Yahoo is not doing better than Google when it comes to monetization of search but it does it way better than MSN which is bleeding money ($500 million in last quarter) and AOL which is becoming more irrelevant to users (by way of loosing users/pageviews). I believe people should cut slack and give yahoo some breathing room. At least it didn’t need bailout such as Citi, BoFA, ML, LB etc who not only sank themselves but also US and world economy.

  6. kaiyzan: while y! leads in many of the key categories you discuss, these are all leftocers from the 90s. its been a very long time since y! has built a real traffic builder internally (the notable excpetion, flickr was a buy, not a build). the story in the last three years in particular is that of facebook stealing traffic (at 200 million users, they will inevitably pass y! in regsitered users) and google taking the revenue. something will disrupt both facebook and google, but it won’t be yahoo. yahoo’s day is done, it joins aol on the yesteryear shelf.

  7. Yahoo! is floundering from a revenue perspective not from a technology or a lack of users perspecitve. Markets and people in the media dont care about technology or users if they are not bringing in more revenue every quarter and getting those double digit % growth numbers.

    They have not lost any connection with their users. Look at news, finance, sports, answers, personals, images, mobile apps, mail, IM, etc, they are all either leading or number 2/3 in their category. I just so happens that currently the real money is made in search and the Big G owns that sector. Dont forget Yahoo! is number two in search as well. Yahoo! Japan dominates that market. They have an insanely great team working on their developers program kicking out great API’s and really cool open source tools for engineers to use.

    At this point its really a growth and focus on monetization issue, not to mention a moral issue with the beating they have been taking over the past 12+ months in the press. Panama has not delivered the way they hoped and as more money flows into search they will need to figure out how to gain some traffic share and/or increase their revenue per click.

  8. Kevin Kelleher

    @Screen Sleuth: I’m not sure I agree the public doesn’t care. And while nobody wants to spend much money, there are some free services that are winning loyalty among people online ( Monetizing new ideas would be tough, but Yahoo does have a decent platform to launch them from and re-establishing that connection must come first.

    So it can be done, but will Yahoo do it? I once read a quote from Marlon Brando, complaining about conditions on a movie set. He described it as like doing the New York Times Sunday crossword puzzle while falling down a mine shaft. I think that kind of sums up Yahoo’s task.

  9. Kevin Kelleher

    @Sidharth: Sorry I wasn’t clear. You’re right, Flickr was created and by many measures a success before Yahoo bought it. I do think Yahoo gets some points for allowing it expand its audience and add features in a way that enhanced it. Yahoo already had a photo site, and to its credit it didn’t fold the two together but kept was was great about Flickr.

  10. Sidharth

    Hi Kevin, a small mistake. Flickr was not a yahoo product – it was an acquistion. So it was the pioneering spirit of the founders and not yahoo or its employees. And btw the founders have even left yahoo now

  11. But how do you reconnect with a public that really doesn’t care much, or wants to spend anything these days? I don’t envy Yahoo’s position, that’s for sure. They may never be able to come back (several people in the “know” that I am acquainted with say that already).