Yahoo Restructures

Analysts greeted news of Yahoo’s restructuring with very little surprise; if anything, the reaction has been "It’s about time!" But will the new organization be enough to save the search engine? This article takes a look at the changes and what they mean for the future.

In truth, it really is about time that Yahoo did something like this. The company restructured five years ago; Microsoft restructures about every five years as a matter of course. Yahoo isn’t Microsoft, of course, but it has some compelling reasons for this move. Its stock price has slipped more than 30 percent in the past year. And of course it has Google to contend with.

If we compare gross income and visitors for both sites, we can see where a big part of the problem lies. Google’s revenue so far this year is $7.2 billion, compared to Yahoo’s 4.5 billion. Yet Google entertains fewer visitors than Yahoo; in fact, Yahoo has the most visited web site on the Internet. Here’s another shocker: Yahoo’s third quarter profits fell 38 percent last October — but how do you reconcile that with a rise in sales of 19 percent leading up to September?

It certainly isn’t the fault of Susan Decker, Yahoo’s highly respected chief financial officer. The problem is that Yahoo simply isn’t monetizing its users as effectively as rival search engine Google. There is also the matter of attitude. Up until recently, Yahoo seemed content to be number two to Google; Decker was even quoted near the end of January 2006 as saying that "We don’t think it’s reasonable to assume we’re going to gain a lot of share from Google…It’s not our goal to be No. 1 in Internet search. We would be very happy to maintain our market share."

In addition to ineffective monetization of visitors and perhaps a lack of hunger to be number one, Yahoo has had to deal with a certain amount of duplication of effort. Having purchased a number of companies with social search functions, for instance, Yahoo has yet to fold them together and build bridges between their communities. With these kinds of problems, a restructuring of the company became not only necessary, but inevitable if the search engine is to survive without continuing to lose market share.

Many of us first learned that a restructuring was probably in the works from a Wall Street Journal story a few weeks ago that leaked an internal memo from Yahoo. That memo, written by senior vice president Brad Garlinghouse, said that Yahoo needed some kind of shake-up and should lay off about one-fifth of its work force. Garlinghouse complained that "We lack a focused, cohesive vision for our company. We want to do everything and be everything — to everyone."

The shake-up is now well underway. Three high-level executives are leaving: chief operating officer Dan Rosensweig; Lloyd Braun, head of the media group; and John Marcom, senior vice president of international operations. I wouldn’t read too much into Rosensweig’s exit, since the new structure seems to unite the roles of CEO and COO (which unfortunately made the COO redundant). Braun’s exit, however, was rumored to be in part as a result of a disagreement, and we can expect to see less original programming from Yahoo as a consequence.

But if this reorganization was only about firing people, it would leave Yahoo little better than it was before. Where’s the vision and focus in getting rid of people? Indeed, Yahoo CEO Terry Semel recognizes that point when he talks about the change. "The Internet is continuing to grow and evolve at a rapid pace, and we’re reshaping Yahoo! to be a leader in this transformation, just as we did successfully five years ago. Our strategy capitalizes on big emerging trends and leverages or core strengths in search, media, communities and communications. We believe having a more customer-focused organization, supported by robust technology, will speed the development of leading-edge experiences for our most valuable audience segments. In turn, we plan to drive growth and profitability by leveraging our deep audience insights to create a full-fledged advertising network, with a marketplace that meets supply and demand both on Yahoo!’s valuable owned-and-operated network and across the entire Internet."

Those are fine words, and certainly rallying words for the troops. But what kind of action is Yahoo taking on those words? Well, by the time the search engine is done, it almost won’t look like the same company. As you’ll see, the reorganization is designed to make it leaner, more nimble, and more able to respond to problems as they come up.

The reorganization is about a lot more than heads rolling. The company will now boast three major units, whose heads will report directly to CEO Terry Semel. These include the Audience Group, the Advertiser and Publisher Group, and the Technology Group. One key point to keep in mind about this change is that, with it, Yahoo is now organizing itself "around audience segments and advertising customers, rather than around products," according to its press release. To me, that looks like  a very real change, not just window dressing. So let’s take a look at the three new groups. 

The Audience Group, created by the merger of seven product groups, will be one of two customer-focused groups. The group’s goal is to "enhance its existing products in search, media, communities and communications; build social media environment across Yahoo!; open more opportunities for users to take advantage of Yahoo! tools and services off network and through mobile and digital devices; and pursue growth opportunities in emerging international markets," according to Yahoo’s press release.

A number of analysts have predicted that this means we’ll see less duplication of effort and more moves to roll products and communities together, such as Del.icio.us and Flickr. Yahoo has made deals in the past concerning search and mobile phones and devices; that’s likely to continue. In general, it looks like Yahoo is going to focus on its strength in social search and social media (thanks to the purchase of all those web 2.0 companies) and rationalize all these disparate parts so they’ll work together. It’s a good move, because a lot of people who are involved in online social communities like to find everything in one place. Currently, Yahoo is looking for someone to head this group.

The Advertiser and Publisher Group "will be created by combining Yahoo’s broad array of marketing solutions, its industry leading sales teams, and its thousands of high quality distribution partners, to create a full-fledged global advertising network on and off Yahoo!," according to the company press release. If you read between the lines, you might be able to detect that its advertising network wasn’t working together very well before. For example, Gavin O’Malley of Online Media Daily quoted a senior media buyer complaining about Yahoo’s search and display sales teams not communicating with each other. "Their organization is set up in such a way that we could spend 50 million dollars in search, and not be recognized at all by the display people." This group will be headed by Yahoo CFO Susan Decker, who will continue to serve as CFO as well until a replacement is found. Many people are speculating that this move is a sign that Decker is being groomed for the top spot once 64-year-old Semel decides to retire.

Finally, the Technology Group, which will be headed by Chief Technology Officer Farzad Nazem, "will continue to support the entire organization…the group will be chartered with leveraging Yahoo’s platform investments in community to create the technology platforms for new social media environments. In addition, it will have a mandate to speed the development of innovative, next generation advertising platforms beyond Project Panama to support the expansion of Yahoo!’s global advertising network," according to Yahoo’s press release. In other words, a lot of engineers are going to be working very hard on social media and advertising, pretty much supporting the other two groups.

Along with the merging of products, Charlene Li, an analyst at Forrester Research, thinks that users will be able to integrate their identities across Yahoo properties so that they aren’t islands anymore. Currently, if you have a Yahoo email account and are also registered to use other Yahoo products, such as Flickr or Del.icio.us, you have to log into each one separately. "The new centralized technology group will certainly help rationalize such inconsistencies," Li notes.

Yahoo even seems to have a new mission statement to go with its reorganization (or at least one I haven’t noticed in their literature before): "Yahoo!’s mission is to connect people to their passions, their communities, and the world’s knowledge." This fits in well with what Li thinks is most important for any search engine going forward: "In the end, the race is not to be the best search engine technology-wise, nor to have the most advertisers. It’s about being relevant to your audience, no matter where they go or what they do." It certainly sounds as if Yahoo realizes that. But how well will they execute?

That seems to be the unspoken question on everyone’s lips. The full results of this shake-up won’t be obvious for some time, and not everyone is sure that it’s enough to fix Yahoo’s problems. Imran Khan, an analyst at JP Morgan, notes that "The coming year will be challenging, in terms of numbers" for Yahoo. And the company’s current position in the market will be difficult to overcome. "The management change doesn’t fix the problem…There are lots of new competitors and Yahoo is not as well-positioned in search as Google."

It’s been noted that Yahoo could maintain and grow its market share by stealing users from MSN and many competitors who have a smaller market share, if it isn’t quite ready to take on "the Google." Its new structure is designed to address the issues of ineffective user monetization and duplication of effort. But perhaps it’s a certain lack of hunger to be number one, to gain some kind of focus and to want to excel in a particular area, that has been most fatal to Yahoo. Whether the search engine has rediscovered that hunger, and can turn that into a will to succeed that will carry them through the struggle in this cutthroat market, remains to be seen.

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