Outside the Lines

On Tuesday's edition of Daily Debrief, our Microsoft-Yahoo watcher Dawn Kawamoto talks with me about what has happened since Yahoo's well-documented August 1 shareholder meeting. Yahoo's stock price is nearing a 52-week low this week, but the herd of press and analysts covering the company are either on summer vacation or allowing Jerry Yang and his somewhat new board of directors a respite from their attention. Like other public companies, Yahoo lives by the financial quarter, so the watchers will be hovering as the quarter ends in September, speculating on how Yang and company perform now that the boardroom melodrama has abated.

Carl Icahn has apparently decided that his 4.98 percent stake in Yahoo common stock is safe in the hands of Yahoo's current eight-member board, which has fought him for control of the company over the last several months. Yahoo co-founder and CEO Jerry Yang lives to fight another day.

Icahn and two other board nominees of his choice will round out the board, keeping current Chairman Roy Bostock and Yang in place. Icahn had proposed a complete board replacement, with Lucian A. Bebchuk, Frank J. Biondi Jr., John H. Chapple, Mark Cuban, Adam Dell, Keith A. Meister, Edward H. Meyer, and Brian S. Posner as his candidates. He has also called for Yang's ouster.

The contentious Mr. Icahn said in a statement:

"I am very pleased that this settlement will allow me to work in partnership with Yahoo's board and management team to help the company achieve its full potential. While I continue to believe that the sale of the whole company or the sale of its search business in the right transaction must be given full consideration, I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders. I believe this is a good outcome and that we will have a strong working relationship going forward. Additionally, I am happy that the board has agreed in the settlement agreement that any meaningful transaction, including the strategy in dealing with that transaction, will be fully discussed with the entire board before any final decision is made."

If Icahn was so adamant about ousting Yang from the CEO spot and doing a deal with Microsoft, what softened his stance? Following are a few suggestions:

On June 27, Microsoft Chairman Bill Gates said he didn't think that his company and Yahoo would make a deal, adding that Microsoft CEO Steve Ballmer will find "plenty of other opportunities.

Not so fast. As Yahoo's quarterly earnings come up on July 22 (see Kara Swisher's take on the upcoming financial results) and the shareholder meeting on August 1, Carl Icahn and Steve Ballmer are teaming up to remake Yahoo's board of directors and shelve Yahoo CEO Jerry Yang. In a letter to Yahoo shareholders, Icahn said:

Steve (Ballmer) made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the 'Search' function, with large financial guarantees or, in the alternative, purchasing the whole company."

Microsoft issued a letter today confirming Icahn's remarks about Microsoft's renewed interest in a transaction with Yahoo:

While, of course, there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo's shareholder meeting, if a new board is elected.

Now the fate of Yahoo is clearly in the hands of shareholders. They can give Icahn a few seats on the board but not enough control to force massive changes or they can hand over the company to him and Microsoft, knowing that a transaction for $33 to $35 per share for the search business or the entire company will be consummated over the next six months.

As I have said before, Microhoo has always been about the money, and less about a shared strategy and cultural fit. Yahoo's board thought that Yahoo was worth $37 per share, and Microsoft wasn't going to negotiate against itself, with no other buyers in sight.

During an interview at the D6 conference, Yang said:

I understand the situation people are feeling, but at the same time we did not walk away from that proposal, Microsoft did. We are willing to do a deal under the right terms. It wasn't clear to me they wanted to finish the deal. I can't go revisit and take or not take it. I understand our obligation to stockholders from conversations with a number of them. The focus for us is how do we recognize more value for the company soon and position Yahoo to be much more successful in the long term. If there is a way to do it, we'll talk about other alternatives, but we aren't going to do something short term.

Yang has some regrets that Microsoft walked away from negotiations in May. He may prefer an independent Yahoo, but reality is setting in, and now he is probably wishing he and his board had played less difficult to get.

Update: Yahoo issued a testy statement regarding the Icahn-Ballmer "apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management."

In the statement, Yahoo invited Microsoft to make a proposal immediately and for Icahn to reveal his plan for Yahoo beyond teeing up Microsoft to make a deal. I doubt Jerry Yang and company are going to receive any kind of proposal until the shuffle at the upcoming shareholder meeting takes place.

On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss this week's big stories. It was a busy week on the search front. Adobe is providing Google and Yahoo with Flash Player technology that allows their search engine crawlers to find and index SWF content, including Flash "gadgets" such as buttons or menus and self-contained Flash Web sites. It's good to make more information accessible via search engines. However, Microsoft has been silent on whether Live Search would index Flash content.

In addition, Microsoft bought Powerset for about $100 million to enhance its search platforms. It's not a substitute for acquiring market share via Yahoo Search, but it provides a foundation for making the search experience far more compelling and precise in fewer clicks.

Of course, the Microhoo drama continues this week with the latest rumors. Larry is ready for this opera to be finished.

Finally, we discuss a judge's ruling in Viacom's $1 billion copyright infringement suit against Google and YouTube.

U.S. District Judge Louis L. Stanton ruled that records of every video watched by YouTube users, including login names and IP addresses, should be given to Viacom's lawyers. Larry said it was like combining the worst aspects of a fishing expedition and a witch hunt. Viacom is maintaining that it won't look at personal data and Google is asking for time to anonymize the information. If Judge Stanton's ruling stands, the last shreds of personal privacy on the Web could be thrown out the window.

On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the executive exodus at Yahoo, the launch of Firefox 3 and Bill Gates' last days as a full-time Microsoftie. We also talk about the impact of millennials, the younger generation brought up digitally, on the corporate workplace. Will they turn off their Facebook, MySpace, iPod, and Twitter while they crunch numbers for a sales report or resolve configuration problems in a data center?

Executive turnover is a fact of corporate life, but Yahoo is treading on dangerous ground with the number of key executives who are abandoning ship (see Techmeme).

Yahoo isn't a sinking ship, but it is beginning to list prominently, further calling into question the captain's piloting and leadership skills. The executive exodus is a tacit rejection of the current leadership and the board.

The executives who resigned are carrying a lot of expertise and institutional knowledge out the door. Some have grown tired of the ongoing battle and uncertainty over Yahoo's future and some are not enamored of the impending major reorganization.

Since Microsoft walked away from the negotiating table in May, Yahoo has been in a tailspin, with shareholder suits (mutiny), a skeptical Wall Street, a hounding press and now the very public resignations of key people.

So far Yahoo has not publicly addressed the executive exodus or outlined the reorganization of the company. It's getting more clear that CEO Jerry Yang and President Sue Decker are treading water. Even if they have the vision, smarts, and passion to right the ship, in this situation someone is usually given up to appease the gods of the business underworld. As I wrote previously, Yang bleeds Yahoo purple, his purple blood is in the water, and the sharks are circling.

The question is who would be ideal to take over the ship, rally the troops and deliver competitive products if Yang stepped down as CEO. Decker may be too tainted from the last several months of upheaval. But what outsider would want to take over the company when Carl Icahn and Yahoo's board are fighting for control of the company. And, if Icahn's group manages to get control of the board, would a new CEO just be present to break up the company so the anxious shareholders can take their money and run?

Unfortunately, this latest chapter in Yahoo's brief but impressive history has been just about the money. It would be far more interesting and potentially beneficial to its 500 million users if Yahoo's team were able to focus on building products.

Yahoo issued a statement this afternoon addressing the series of departures:

"We have a deep and talented management team across all areas of the company. Our successful implementation of our core strategies and the timely rollout of key products this year testifies to the effectiveness of our team, and we continue to recruit outstanding talent. Yahoo continues to be a leader in our industry and remains a unique, exciting, and important place to work even as we experience the attrition that's to be expected in the Internet industry."

The reality is that the deep bench of talent is getting thinner by the day, and it's becoming more difficult to recruit outstanding talent under the current circumstances.

With the Microsoft/Yahoo/Google triangle taking a new shape as Microsoft exited and Yahoo and Google connected, the analysts covering tech industry sports are weighing in with their opinions.

Some Wall Street analysts believe Microsoft will take another run at Yahoo if the company can't get back on track or Carl Icahn wins his proxy fight to control the Yahoo board. That may be wishful thinking. Kara Swisher reports that Microsoft is done with its courtship of Yahoo and nothing will bring them back to the negotiating table.

Mike Arrington of TechCrunch called the Yahoo-Google deal a massive destruction of shareholder value, employee morale, and the Interent balance of power:

Yahoo's hatred of Microsoft runs so deep that they were actually, in the end, willing to destroy the future of their company just to keep it independent for a short while longer. They've ignored the wishes of their shareholders, employees and many now former key employees in killing that deal. And apart from Google, CEO Jerry Yang, President Sue Decker and possibly Tim O'Reilly, I don't believe there is anyone in the world that is happy with what has happened.

In a further lambasting post, Arrington called Yahoo desperate and possibly neurotic:

Quite simply, it looks to me like Yahoo is effectively paying Google off to step in and (1) keep Jerry Yang, Sue Decker and the current board of directors in power, and (2) avoid a desperation deal with Microsoft for as long as possible, or longer. It's not even clear to me that Google wants this deal, based on the terms. It almost looks like they're just doing Yahoo a favor, and trying to keep them out of Microsoft's hands.

At the other end of the spectrum, venture capitalist Fred Wilson thinks that Yahoo did the right thing by choosing Google over Microsoft as a partner.

Yahoo! finally woke up and did what they should have done years ago, cede search monetization to Google who simply does it better and will always do this era of search better than anyone else.

Now Yahoo! will do what it needs to do. Clean house, get lean, get out of businesses it shouldn't be in. Focus on what it's good at. And start making money and growing again.

They may need new leadership to do that. But selling this asset to Microsoft just because they had the wrong leadership and probably still have the wrong leadership is a mistake.

From my reading of the events over the last five months, Yang regrets that Microsoft walked away from the acquisition talks. "We all felt and understood a combination done right has a tremendous amount of power and leverage," Yang said during an interview with Walt Mossberg at the D6 conference.

Yahoo CEO Jerry Yang and President Sue Decker have a challenging set of quarters coming up.

(Credit: Dan Farber/CNET News.com)

As a founder, Yang preferred that Yahoo stay independent and that he have the chance to turn the company around as CEO. Microsoft historically was not the kind of partner that Yang considered for a marriage. And his board of directors, led by non-executive Chairman Roy Bostock, seemed to go along with that line of thought.

But the entire affair turned out to be mostly about the money, as Decker admitted. "We never got through the price door," she stated during the same D6 interview. Yahoo's board believed that the company was worth more than $35 per share based on future promise, and Microsoft wasn't on the same page. In effect, Microsoft called Yahoo's bluff.

It also wasn't helpful that Yahoo was negotiating the search deal with Google at the same time Microsoft was pursuing its hostile bid. After months of rejection, Microsoft basically became less enchanted with the potential marriage, and despite the pummeling from the shareholders, Carl Icahn's camp, and the press, Yang and his advisors held out for more money.

Unable to come to terms with Microsoft on a generous deal just for the search business, Yahoo took the less complicated, non-exclusive Google deal that allowed the company to remain in the search game.

As I wrote in my post "The battle for Yahoo's soul," Jerry Yang and Sue Decker have a short runway--about six months--to prove that they can "redefine" the essence of Yahoo in a way that yields more revenue, profit, and positive buzz. With the continuing board room distractions, employee defections, and morale issues that go along with being under siege by various parties, the duo have their work cut out for them.

In this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the two big stories of the week--Yahoo hooking up with Google and the introduction Apple's 3G iPhone launch.

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.