Yahoo Layoffs: This Could Get Ugly

Blogs and more respected publications such as the New York Times and the Wall Street Journal talk about rumors that battered search engine Yahoo is about to make massive layoffs. Some sources tout numbers as large as 2,500. Is there any truth behind these rumors? And what are the implications?

Let’s address the first question first. I don’t know anyone willing to give me inside information at Yahoo, regardless of whether I use names. But I do read a lot, and I do have a certain sense of history. I distinctly remember when Jerry Yang, Yahoo’s co-founder, took the CEO slot away from Terry Semel in June of 2007. At that time he said he’d spend “the next 100 days or so focused on mapping out a strategic plan for the long-term success, working with our teams to put the right organization and the right people in place, and making any necessary changes.”

Those 100 days would have been up right around the time of Yahoo’s Q3 2007 earnings announcement. While Yahoo did deliver a solid quarter, it apparently wasn’t good enough for Wall Street. Net income for the quarter was $0.11 per share – exactly the same as the net income for the same period in 2006, when Terry Semel was still in power as CEO. It was as if Yahoo was simply delivering more of the same, even after the management changes (more than 17 executives at the vice president level or higher have left Yahoo since December 2006).

“More of the same” is not going to get Yahoo out of the fix it’s in. Henry Blodget of Silicon Alley Insider was predicting at the end of October last year that “Yahoo may have to lay off about 1,200 people.” Back then Blodget cited several years of recovery from the first dot-com bubble and an increasing stock price running headlong into “the Google juggernaut,” which “gobbled up much of Yahoo’s market share.” So if those layoffs actually happen, at least one person can say he saw it coming for months.

There have been tantalizing clues from Yahoo itself that there is something behind the rumors. In a statement, the company said that “Yahoo! has embarked on a multi-year transformation that includes making tough decisions about the business to help the company grow. Yahoo! has focused its efforts to support its strategy to become the indispensable starting point for consumers, advertisers, publishers and developers. Yahoo! plans to invest in some areas, reduce emphasis in others, and eliminate some areas of the business that don’t support the company’s priorities. Yahoo! continues to attract and hire talent against the company’s key initiatives to create long-term stockholder value.”

I’d submit that key phrases like “tough decisions,” “reduce emphasis” and “eliminate some areas” all but scream that layoffs are on the horizon. Clearly, this is more than a rumor. According to most of the articles I’ve read covering it, we’ll know for sure when Yahoo releases its fourth quarter and year-end figures on January 29. Actually, it might take a little longer than that; some observers expect Yahoo to wait and see how Wall Street responds before going ahead with the job cuts.

Wall Street must look pretty scary to Jerry Yang right now. The search engine’s stock has lost more than half of its value since early 2006; recently, it closed at under $21. Sramana Mithra, writing as a guest author for GigaOm, noted that Yahoo has lost about $20 billion in market cap over the last two years. Some observers believe that if Yahoo’s stock drops into the teens, Jerry Yang himself could become vulnerable.

It’s widely perceived that Yang is too nice of a guy to carry out the kind of ruthless job cuts that Yahoo seems to need. But does Yahoo’s “fat” really amount to as much as one-fifth of its work force? Some stories in the press say the numbers will be in the hundreds, not thousands. Others suggest that the number of layoffs need to equal at least 1,000 in order to be meaningful. Erick Schonfeld at TechCrunch calculated that cutting 500 people would only save Yahoo $50 million, while cutting 1,500 would add $150 million to its bottom line – coincidentally, the same amount of money that the company netted in its entire third quarter.

Either way, news of even the possibility of such large layoffs will still have an impact on Yahoo’s 14,000-strong work force. But frankly, Yang might not have much of a choice if he wants to show both Wall Street and those at his own company that he’s tough enough to make the hard decisions and follow through. Some important questions remain, of course.

If we take it as a foregone conclusion that this is no mere rumor and the cuts are real, we have to ask how they will be applied across the company. Will they be made in an even-handed way, with each part of the company losing some people? Or will some parts lose more than others, with certain Yahoo operations perhaps losing everyone and closing their doors? And how will the struggling search engine allocate its remaining resources?

Henry Blodget claims that there is a list of people who will be laid off. He stated in his blog that the list “is reportedly the product of a Q4 project in which all group heads were asked to look at redundancies and create their own lists of potential cuts. All the group-level lists have now been turned in to corporate.” If this is what actually happened, then the cuts might happen in a relatively even-handed manner (though not from the point of view of those receiving pink slips!), with every portion of the search engine experiencing significant but not drastic cuts.

Meanwhile, observers of Yahoo’s plight are not above making their own suggestions as to where the cuts should come. Peter Kafka, writing for Silicon Alley Insider, cites one Silicon Alley executive as thinking that Yahoo’s cuts should “be focused in one particular area – [Yahoo’s] paid search business.” The executive thinks that Yahoo will never be able to make up ground against Google in search ads, so they should find other ways to capitalize on their huge brand and audience.

Blodget, meanwhile, thinks that the cuts should be made in Yahoo’s U.S. work force “because it is the U.S. operating margin that has deteriorated.” But Rafat Ali, writing for PaidContent.org, thinks that a lot of the layoffs will come from some European units. He cited a Financial Times story in which Toby Coppel, head of Yahoo’s European business, sounded “an ominous warning…Yahoo staff was given until Q1 2008 to revamp the poorly performing parts of its European business, or these would be closed down or sold.” Ali further stated that the FT story suggested the search engine might outsource some European search operations to third parties.

So where will Yahoo allocate its newly-reduced resources? The New York Times article on the subject said that the search engine was likely to keep or grow its investments in Internet search, e-mail, its front page and personalized home page service (MyYahoo). News, finance and sports would also remain. But the Times noted that Yahoo revealed plans in recent months to phase out or consolidate certain services. These included photos, premium music, auctions and its not-quite-popular-enough social network, Yahoo 360.

It’s true that Yahoo has been struggling to find itself seemingly for years, ever since Google became its top competitor. These job losses, whether they happen all at once or with multiple cuts over time through both layoffs and attrition, are just the latest in a long, seemingly futile battle. The whole point of the layoffs, regardless of the area(s) they hit hardest, is that Yahoo needs to redefine itself if it hopes to avoid going the way of AltaVista.

Or is something else going on here? Many media outlets were reporting fears that the U.S. is entering a recession as far back as October. Earlier this month, the International Herald Tribune even quoted Jan Hatzius, the chief U.S. economist for the investment bank Goldman Sachs, as saying that “Recession has now arrived or will very shortly,” though his company figures it will be a mild recession contraction that lasts only two to three quarters.

Over at Search Engine Roundtable, some have a feeling that this is the start of a trend at Internet companies – that the bubble may be about to burst once again. If so, that would position Yahoo, with a massive round of layoffs, as the canary in the mineshaft, warning the rest of the miners to get out – or rather, warning the other Internet companies that hard times are ahead once again.

Here is some food for thought along those lines:

 

It’s a chart from Yahoo Finance that shows the ups and downs, percentage-wise, of two stocks over a three-month period: Google (in blue) and Yahoo (in red). One needs to look at many other indicators to see whether we’re entering a recession, even for a particular sector of the economy, but this is at least tantalizingly suggestive. Yahoo has quite a fight ahead of itself: strong competitors, a necessary reorganization after a rather messy period internally, and a possible recession on the horizon. It survived the first dot-com bubble, but it will need all the luck in the world for the months ahead.

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