June 13, 2008 7:45 AM PDT

The battle for Yahoo's soul

by Dan Farber

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Jerry Yang bleeds purple for the company he founded.

(Credit: Dan Farber)

Yahoo CEO and founder Jerry Yang "bleeds purple." Microsoft wanted to take control of his purple blood in its quest to compete with Google. Carl Icahn may want a plain old bloodletting. The corporate raider could send Yang packing or confine him to the boardroom if he continues with his effort to get a dissident slate elected to Yahoo's board of directors at an upcoming shareholder meeting.

Thursday, Yang took a stand, announcing talks with Microsoft about any kind of transaction have concluded and inking a non-exclusive search deal with Google. If Icahn's was intent on getting Microsoft to cough up around $35 per share for Yahoo, that dream is over, and other buyers haven't surfaced.

But even if Icahn walks away, the battle for Yahoo's soul won't be over for Yang as he tries to maintain control of the company he founded in March 1995 with fellow Stanford graduate student David Filo. The fight doesn't get any easier from here as key executives abandon ship, products continue to be slow to get to market, and uncertainty hangs over Yahoo's Silicon Valley campus. In the immediate wake of the "Microsoft out, Google in" announcement, Yahoo's stock has slid 15 percent.

The morning after: Yahoo's stock has taken a hit in the wake of Microsoft's exit and the search ad deal with Google.

Yang might be called a reluctant CEO, and this tangled scenario can't be what the 39-year-old Yang imagined when he replaced Terry Semel as CEO almost a year ago, on June 18, 2007. The former Time Warner executive had led Yahoo's growth spurt, from revenue of $717 million in 2001 to $6.4 billion in 2006, but his Hollywood-honed skills and luck ran out over the last several months of his tenure.

At the somewhat contentious June 12, 2007 shareholder meeting, Semel didn't give any indication that a week later he would resign as CEO. In fact, Semel said Yahoo has all the pieces to be successful and that he couldn't wait to prove it. Less than a week later, he walked.

Better days: Susan Decker, Terry Semel, Jerry Yang

(Credit: foreverdigital)

With Semel's abrupt departure, the board could have searched for an outsider to run the company, or appointed Decker or Yang as CEO. An external search would have taken months and put the company in limbo. Decker was not deemed ready to take over, although she had been groomed by Semel and was lauded for her business acumen.

That left Yang to run the show. He was respected by the troops, and had a vision of where Yahoo should go and the fervor of a founder. As Chief Yahoo for a dozen years, Yang had been involved in strategy, technology, and business development. But, the CEO job was a very different role, of course, and Yang didn't have extensive operational experience. But then neither did Decker, tapped to be president and Yang's No. 2.

Compounding the problem, Yahoo's management bench had become thin. Semel's exit had been preceded by the departure of two key operational executives, COO Dan Rosenzweig, who left in December 2006 with media chief Lloyd Braun in a management shakeup. Farzad Nazem, Yahoo's veteran CTO and executive vice president of engineering and site operations, retired from the company just a few weeks prior to Semel vacating the CEO role. (At the time of Semel's departure, Yang was also acting as the interim executive sponsor of Nazem's technology group.)

In his remarks at the D6 conference last month, Yang shed some light on his thinking and the board's vote to have him serve as Yahoo's chief executive:

"It wasn't lightly that I came to the decision I want to be CEO. I understand the challenges and I understand that I don't necessarily have all the experience, although I have admired Terry and Tim Koogle before him and just some great leaders who helped us run the company. But I also felt it's my time to really take Yahoo to the next level. I feel like I am most passionate and have the most vision about where for where we want to be.

"I know that people want to see results, and I think in this day and age a lot of people are more short-term oriented, but I think we are starting to show that Yahoo can be on this path to be a very different entity."

At D6, Walt Mossberg talks with Jerry Yang about taking on the CEO role at Yahoo.

Decker, on the other hand, had served as the company's CFO for seven years and then as head of the Advertiser and Publisher Group from December 2006 until she was appointed president in June 2007. She came to Yahoo from Donaldson, Lufkin & Jenrette, where she was last global director of equity research and was involved in taking Yahoo public.

In a letter to Yahoo's board of directors, Semel (who was also board chairman) sold the new executive duo as an "unbeatable team":

Jerry has long been recognized as an Internet visionary. His incredible experience and close involvement since founding the company 12 years ago have given him unique insight about the industry and unparalleled knowledge and understanding of Yahoo and its potential.

Semel also described Decker as a "strategic powerhouse," "financial wizard," and "one of the best business people around."

Brad Garlinghouse, author of the Peanut Butter Manifesto.

(Credit: Dan Farber)

Systemic problems
Despite that early enthusiasm, Yang's passion, vision and "purple blood" hasn't led to any quick fixes. The problems have been far too systemic. Eight months before the corner office turnover, an internal memo, dubbed the "Peanut Butter Manifesto," offered a view into the company's problems. The main indictment cited by the memo's author Brad Garlinghouse, Yahoo's senior vice president in charge of services including Yahoo home page and Mail, was that company lacked focus:

"I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

Garlinghouse elaborated on the reactive environment and lack of a cohesive strategy in his memo:

"We want to do everything and be everything--to everyone. We've known this for years, talk about it incessantly, but do nothing to fundamentally address it. We are scared to be left out. We are reactive instead of charting an unwavering course. We are separated into silos that far too frequently don't talk to each other. And when we do talk, it isn't to collaborate on a clearly focused strategy, but rather to argue and fight about ownership, strategies and tactics. Our inclination and proclivity to repeatedly hire leaders from outside the company results in disparate visions of what winning looks like--rather than a leadership team rallying around a single cohesive strategy."

He also cited a penchant for "analysis paralysis" and massive redundancy throughout the company. He recommended cutting 15 to 20 percent of the workforce and selling off non-core businesses. In addition, he called out a lack of accountability and passion among the troops:

"Far too many employees are "phoning" it in, lacking the passion and commitment to be a part of the solution. We sit idly by while--at all levels--employees are enabled to "hang around". Where is the accountability?"

Garlinghouse's memo wasn't ignored by his superiors, and a few moves were made to address his criticism in the months following.

In May 2007, the company announced that Yahoo Photos would be shuttered in favor of Flickr, a photo-sharing application acquired in 2005. In September 2007, Yahoo acquired Zimbra, which developed e-mail and collaboration software, which is more advanced that Yahoo's own services, for about $350 million. At the same time, Yahoo made an unsuccessful attempt to acquire Facebook, and the Microsoft courtship (for better or worse) was getting underway.

But at the same time, Yahoo was falling further behind Google in search advertising, and outmaneuvering Yahoo on acquisitions. Just prior to the Garlinghouse's memo, Google outbid all competitors for YouTube. Google also beat out Yahoo, as well as Microsoft, for major search ad deals with MySpace and AOL.

And Yang had Semel's past decisions to deal with. Plaintiffs in a shareholder lawsuit filed against Yahoo's board of directors regarding the rejection of Microsoft's $33 per share offer, claim that in January 2007, Microsoft offered to pay $40 per share for the company. Semel apparently rejected the offer and proposed a commercial partnership as an alternative.

Push for relevancy
Shortly after taking on their respective new roles, Yang and Decker conducted a 100-day business review, saying that there were no "sacred cows." On July 17, 2007, Yang said, "We will accelerate transformation and invest heavily," said Yang. "We are in investment mode."

Yang and Decker hired consultant Stone Yamashita Partners in August of 2007 to help revamp the strategy.

In a letter to the troops on October 16, 2007, Yang outlined the new strategy, but it didn't offer specifics about how Yahoo would regain momentum. Instead he talked about being more relevant to different customers of its services:

"We defined a strategy that revolves around making Yahoo indispensable to an ecosystem of consumers, advertisers, publishers and developers while tapping into three key differentiators: generating and leveraging insights, deploying open platforms, and becoming partner of choice. While these have long distinguished us, we intend to do more with them going forward."

"We will do so by measuring how much more 'relevant' we can become for each member of our ecosystem. We believe centering around "relevance" will become a unifying focus for us and drive increased value in everything we do."

The relevancy translates to becoming the starting point for the most consumers, becoming the must-buy for advertisers and delivering open, industry-leading platforms that attract the most publishers and developers.

It's not as though Yang and Decker were starting from scratch to achieve the three goals. Yahoo has 500 million unique users per month, including 240 million email users, but is far behind on gathering users for search and social networking.

In January 2008 at the Consumer Electronics Show, Yang gave a preview of the plan to rewire Yahoo with a social dimension, tapping into what he called 10 billion latent connections among its user base. Designated as the Yahoo Open Strategy, the rewiring will involve creating a single profile for each user, rationalizing identities across different relationship groupings, such as the Yahoo Mail e-mail address book, Yahoo Messenger contacts, Flickr friends, Yahoo 360, and Yahoo Mash.

Version 1.0 of Yahoo Open is slated for release at some unspecified time later this year, and will include a development environment for several properties, a social "activator" and social graph engine, an events engine, and a single profile for users, according to Ari Balogh, the former Verisign CTO who replaced Farzad Nazem as Yahoo's CTO in January 2008.

On the advertising front, Yahoo announced AMP!, a new ad management plaform in April, which is expected to broadly roll out in Q3 2008.

In January, more than a year after the Peanut Butter Manifesto was published, Yahoo laid off about 1,000 employees, bringing the headcount down to around 13,200 employees.

Nonetheless, a year into their tenure, Yang and Decker don't have much to show in terms of delivering the rewired Yahoo other than demos and Search Monkey. Zimbra's superior e-mail service, for example, still hasn't been leveraged across company. Yahoo continues to lose share to Google in search. Today, Google has about 70 percent of the search market in the U.S. compared to Yahoo's 20 percent. Google's YouTube has lapped the competition in online video.

At the D6 conference, Decker said that she and Yang haven't had enough time to turn around the company, especially in light of Microsoft's hostile takeover bid, which was launched February 1, just a day after Semel resigned as Yahoo's board chairman:

"It isn't a six-month job to turn it around based on where we were. Our scale was working against us. We are trying to move our scale to work for us, both in terms of the consumer side and the advertiser side. That's the question--where is the value today versus what's the value in two years. That's a judgment call that boards have to make."

Decker made a case for rejecting Microsoft's $33 per share offer. She said Yahoo had huge inventory--500 to 600 million people every month, which Yahoo's board said was undervalued. She also said that 90 percent of advertising inventory is not search related. Yahoo is about to launch a new system that makes it easy to buy display ads, which have a 10x to 100x difference in value versus search ads, she stated. "It's an enormous asset and that's the reason why there is a lot of interest," she concluded.

During the same interview with The Wall Street Journal's Walt Mossberg, Yang tried to make a case that Yahoo is getting stronger because of the turmoil and uncertainty:

"The perception of us being a company under siege is just not accurate. The process has in many ways pulled together Yahoo as a company. It's a real life exercise of crisis management. What we do matters. I think in a way that's what the morale and culture at Yahoo is all about."

Yang added that Yahoo can continue to build great products and move forward and is more ready for the challenges ahead than last year. "The essence of Yahoo is being redefined today and making us stronger," he said.

It's expected that Yang would say that Yahoo is not under siege. On the other hand, "real life crisis management" conjures up a kind of siege. Whatever the case, Yang and Decker have been fighting an uphill battle and, since they took over the company, haven't had much time to get up the hill.

It could be that Yahoo, and Yang and Decker, will be stronger for having survived Microsoft and (perhaps) Carl Icahn and irate shareholders--though the continuing exodus of senior managers, such as executive vice president Jeff Weiner, is a major hindrance. But with Microsoft slouching back to Redmond, at least for now, and rival Google providing an assist, the duo will have a short runway to prove that they can "redefine" the essence of Yahoo in a way that yields more revenue, profit and positive buzz.

Dan Farber is editor in chief of CBS Interactive News, which includes CBSNews.com and CNET News. He has more than 25 years of experience as an editor and journalist covering technology. E-mail Dan.