Yang to Step Down as Yahoo CEO

It must have been a heartbreaking decision, but Jerry Yang, co-founder of venerable but battered search engine Yahoo, agreed to step down as the company’s CEO as soon as the board of directors finds someone else to fill that role. In this article I plan to take a look at the factors that got Yahoo into its current mess, and how it may go forward.

As any parent knows, when you’re there for the birth and helping to raise your baby, it takes over your life – and it’s hard to let go. Yahoo is only 13 years old, but that’s a long time in Internet years. Jerry Yang hasn’t been CEO for the entire time; his most recent stint has lasted 18 months so far. But in many ways, it’s clear that he still thinks of it as his baby – and, like a parent, he may be blind to his child’s very real problems, and therefore unable to help solve them.

These problems have been brewing for a long time, but those outside the company got their first real look at them when an email written by Brad Garlinghouse, a senior vice president at Yahoo, leaked to the press. The November 2006 memo took the company to task. It focused criticism on the leadership, and stated the author’s opinion that many of the company’s problems relate to being involved in too many different projects, products, and initiatives. The email came to be known as the “Peanut Butter Manifesto” because he said Yahoo was spreading itself as thin as peanut butter.

Some date Yahoo’s problems back to the appointment of Terry Semel as CEO in 2001. Semel’s background boasted serious chops in the entertainment and content industries, since he served 24 years at Time Warner, most recently as chairman and co-CEO, before accepting the top spot at the search engine. By this time Google had begun garnering tremendous market share, and some at Yahoo thought they could compete by recasting themselves as a content-focused firm.

Yahoo also tried to become competitive by buying other companies, with a special focus on Web 2.0 firms. Del.icio.us and Flickr were two of the more prominent purchases, and they are still leaders in their respective fields of shared social bookmarking and photo sites. In general, these purchases fit into Yahoo’s  strategy of focusing more on content, and in fact Yahoo won some battles in this arena, even with homegrown content. No one can deny the popularity of Yahoo News, or of Yahoo’s financial portal, for example.

But Yahoo’s stock took a beating, as did its market share. Far more people wanted to search for information on Google than on Yahoo, because Google’s searches developed a reputation for being more accurate and relevant. It seemed that searchers didn’t want to spend time on a portal; they wanted to quickly find the web site, product, or information they needed, and be on their way. Google catered to this with its Spartan home page.

With every search, Google displayed text ads, helping advertisers to find the right person at the right time. Google lined its pockets with the revenue from these ads. Yahoo ran ads, too – in fact, the company’s display ads (as opposed to search ads) did very well. Indeed, Yahoo boasted a more diverse revenue stream than Google’s, but apparently it wasn’t enough to please the stockholders – and really, who could blame them, with the company’s stock price falling?

Yang stepped in as CEO in mid-June 2007, as Semel and the rest of Yahoo’s board faced serious shareholder criticism for what had been happening at the company. Yang’s previous title had been Chief Yahoo, a title he will now resume. It wasn’t the easiest of transitions back then, as he was also serving as the company’s temporary Chief Technology Officer at the time. And Yahoo had received some bad PR over the jailing of a Chinese journalist – an imprisonment made possible, in part, because Yahoo cooperated with Chinese authorities.

By the end of January 2007, Yahoo had announced some innovations; it had revamped its Yahoo Mail and created a number of mobile applications so users could get the most out of the mobile web, regardless of the capabilities of their portable net-connected device. But Yahoo also announced that it would lay off about 1,000 employees as a cost-cutting measure and, perhaps, an admission that the “Peanut Butter Manifesto” was right: the company was spread too thin. A major reorganization was in the works.

 


Photo courtesy of prettytypewriters under Creative Commons license.

Immediately after this, Microsoft publicly announced that it had made an offer to acquire Yahoo. This was nothing to sneeze at: it was a $44.6 billion cash-and-stock offer that would have represented the single biggest purchase in the software giant’s history. Yahoo’s stock rose more than $9 per share on the news, closing at $28.38. Many observers speculated that Microsoft wanted Yahoo mainly for its search technology; king of the desktop, it had been unable to make any headway against the growing Internet monolith that was Google. It must have thought that by joining forces, Yahoo and Microsoft would have a chance to survive in a future where the net’s increasing importance meant that more people spent more time online…and where Google’s online services nibbled at Microsoft’s desktop dominance.

But Yahoo rejected the offer, and many observers today think this was Yang’s biggest mistake. By May 2008, it was revealed that Microsoft had offered $33 per share, a substantial premium, but Yang had not been willing to go any lower than $37 per share, insisting that the company was worth at least that much. Some observers cited Yang’s well-known hatred of Microsoft as one reason for his intransigence.

Indeed, that hatred was so strong that it sent Yahoo into the arms of its biggest rival. In mid-June, Google and Yahoo unveiled a partnership in which Google would supply some ads for Yahoo search results. Yahoo would benefit from the revenue-sharing aspects of the deal, to the tune of an estimated $800 million and then some in the first year. At the same time, Yahoo’s talks with Microsoft to sell a smaller part of the company broke down. This came as no surprise; indeed, many said that part of the point of the Google deal was to poison any hope of a deal with Microsoft.

Meanwhile, the reorganization proceeded apace. By the end of June, Yahoo had lost at least three executive vice presidents and two senior vice presidents – and one of the latter was Brad Garlinghouse, author of the notorious memo I mentioned earlier. The move put Sue Decker into the spotlight as Yahoo president, and made the company leaner and (one assumes) more focused. It also put Yahoo under a great deal of pressure to perform – a pressure already brought nearly to the breaking point thanks to the grassroots stockholders’ revolt encouraged by Carl Icahn as a result of the company’s rejection of the Microsoft deal.

Yahoo couldn’t ignore Icahn. He held five percent of Yahoo’s stock, and his reach was apparently out of proportion to that percentage. By late July Yahoo settled with him by agreeing to give him and two of his allies a seat on the board. That probably pleased Icahn, but it seemed to make another investor very unhappy; T. Boone Pickens dumped 10 million Yahoo shares around this time.

With the shareholders still in revolt in August, a vote-counting slip-up was uncovered that revealed support for Jerry Yang and company chairman Roy Bostock was much lower than initially reported. About one third of shares withheld votes for Yang, and nearly forty percent withheld votes for Bostock.

Just when Yahoo must have figured things couldn’t get worse, they did. In late October 2008, the company reported a 64 percent decline in net income, and revealed that it would lay off at least 1,430 people. Even the one potential bright spot – the ad deal with Google, and the juicy revenue associated with it – couldn’t help, as the Justice Department took a long, hard look at the situation. Smelling the threat of an antitrust lawsuit, Google backed away from the deal. Even the offer of a narrower deal couldn’t satisfy the DoJ. Conspiracy theorists will be delighted to hear that Declan McCullagh, writing for CNet, cites “Microsoft’s take-no-prisoners lobbying efforts in Washington, D.C.,” as one of the reasons for the Justice Department’s heavy scrutiny, which caused the deal to fall through.

So what is left for Yahoo? Well, the company’s stock rose – to $11.10 – on news of Yang stepping down. But Yahoo stockholder Eric Jackson noted that “This is a board failure more than it is Jerry’s failure. These problems have been around at Yahoo for well over two years now.”

With Yang out of the picture, will Yahoo reconsider being purchased by Microsoft? That will depend in part on who the company chooses for its new CEO. Both internal and external candidates are being considered; Sue Decker is one potential contender, as is Dan Rosensweig, Yahoo’s former chief operating officer, and Jon Miller, a former AOL CEO. Many analysts do think that Microsoft will now come back with an offer to buy Yahoo in the next three or four months, but there is reportedly no discussion of this at all at the software giant. (Then again, you’d expect to hear this; why fuel speculation and a rise in stock price when you can keep mum and possibly get the company for a bargain price?). And Yang’s stepping down makes it more likely that a deal will go through; at the very least, it gives Yahoo’s board a chance to change its tactics from Yang’s insistence that they go it alone rather than be bought even in part by Microsoft.

The problem is, many of the arguments made back when Microsoft originally tried to purchase Yahoo haven’t changed; if anything, they’ve grown stronger in some ways as the economic climate has worsened. The two companies have two completely different cultures, and even putting the two together won’t raise their market share to anywhere near Google’s. In fact, a merger could wreck both companies, because it would distract them from the things they both do best.

So what is Yahoo’s future? A purchase by Microsoft still looks inevitable, one way or another. Too many at the company don’t have the heart to go it alone – and even if they did, it would take someone of the caliber of Steve Jobs to turn them around. Many observed at the time that Jerry Yang took the CEO spot again that he was no Steve Jobs. But neither is Steve Ballmer. Yahoo’s end may come, at last, not with a bang, but with a whimper…unless someone can find another Steve Jobs.

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