• by Liz Tascio , August 2, 2007

Disappointing earnings, executive shuffles. No wonder Yahoo has investors nervous. Liz Tascio reports

There’s no question about it: Yahoo’s had a rough 18 months. CEO Terry Semel was ousted, ad chief Wenda Harris Millard left and hopes of purchasing Facebook appear to have been publicly scuttled. And that’s on top of other, lesser setbacks: a leaked internal memo analyzing the company’s shortcomings, stock declines and rumors of a sale.

Now, with a new chief executive and a new president — both from within — and Panama, a major new ad offering, the company that used to be the undisputed industry leader will try to prove it’s still got what it takes to be innovative, flexible, smart and, above all, stable.

“Our goal is to drive the creation of the industry’s most open, accessible and vibrant advertising marketplace,” says Todd Teresi, Yahoo’s senior vice president of display marketplaces.

Indeed, for all its well-documented troubles, the company does have enormous assets, from its half a billion users to its vast collection of data about their habits. It’s well-positioned to leverage social networking, has tons of ad inventory, and the new members of its executive team actually seem to inspire trust and confidence.

Therefore, some industry experts say, this is no time to be bleak: The company has quite a few ways it can get back its famous edge, from negotiating major buys, to improving company morale, to finally getting Yahoo Mail out of beta.

Morale Boosters

The big question: Must Yahoo surpass Google in search?

“They’re really not as good as Google in search, and I don’t know if they’ll ever be,” says Scott Kessler, an analyst at Standard & Poor’s. “Is that essential to their success? Absolutely not.”

For starters, the company should get much more aggressive about acquisitions, says Kessler, pointing to Yahoo’s flubbed negotiations for Facebook.

“They should really unleash Blake Jorgensen” Kessler says, referring to the chief financial officer Yahoo hired from Thomas Weisel Partners. “He knows the tech sector landscape, especially in Silicon Valley. He’s a deal-maker.”

Yahoo brought in Jorgensen in May to replace Susan Decker, who was named in June as the company’s new president. At the same time, Yahoo

co-founder Jerry Yang stepped up to become CEO, replacing Terry Semel, who was criticized for taking generous compensation while the company slipped further behind Google. Semel became non-executive chairman of the board.

In July, Yahoo announced it would acquire Right Media, known for its ad exchange. Acquisitions like that help the company in several ways, one of which is by boosting employee morale, says Ellen Siminoff, one of Yahoo’s original executives. She left in 2002 and is now president and CEO of Efficient Frontier, a search engine marketing company that deals with Google and Yahoo.

“In a lot of ways, inside morale is more important” than outside perception, Siminoff says. “That’s going to drive innovation.”

Peanut Butter or Glue?

Not that Yahoo hasn’t been introducing new features, says Andrew Frank, research vice president at Gartner Inc. He points to SmartAds and the company’s mash-up tools as particularly sharp developments.

“They’ve done a lot more innovating than they probably get credit for,” Frank says. “There’s a vicious circle that gets going when investors start to be disappointed. They express their disappointment to the media, and the media paints a dark picture. I think often a cloud gathers.”

But Yahoo often seems to be more interested in playing catch-up with Google than forging its own path.

“Google this year announced some improvements to Google Finance, really pushing Yahoo to move forward,” Kessler says. “Google partners for distribution; Yahoo decides to do it. Yahoo needs to say, ‘We don’t care about what the competition is doing.’ ”

Trying to be all things to all people led to the 2006 Peanut Butter Manifesto — a leaked memo in which Brad Garlinghouse, a Yahoo senior vice president, warned that the company had spread itself too thin across redundant properties.

But David Card, an analyst at JupiterResearch, says Yahoo should be involved in everything.

“That’s what a portal is. A portal is gluing together a lot of content and services for special-purpose functions for a general audience,” he says. “They should be the masters of gluing those things together, and also delivering a rich targeting platform for their marketing partners.”

Moving Targets

In June, around the time Wenda Harris Millard, Yahoo’s chief U.S. sales officer, resigned for a position at Martha Stewart Living Omnimedia, Yahoo merged its search and display advertising departments, and, in another internal promotion, put David Karnstedt in charge.

That merge was a good move, because no company is better positioned to integrate display and search, Kessler says.

“What you’re seeing is a number of trends that are pointing to the increasing blurring between search and display, as search starts to support more graphical forms of content and as display becomes more targeted,” Frank says.

Yahoo is positioning itself to benefit by using its data to do more efficient behavioral targeting and geo-targeting, he says. That same wealth of data puts the company in an excellent position to leverage social networking, something it hasn’t done well, Card says.

“The big knock that Yahoo gets a lot is that they haven’t done a very good job with integrating all these different components that they’ve assembled, so you still have a separate experience on Flickr or Del.icio.us or Answers,” Frank says.

“But I don’t think that challenge alone answers the question of how do you best monetize social networking.” The answer here, again, is targeting, Frank adds.

Yahoo’s broad capabilities, huge market share, and untapped potential remain — even after all its difficulties.

“It’s very easy, especially with the management shake-ups that Yahoo has experienced in the past few months, to portray them as a company in disarray,” Frank says. “Their biggest crime is they’re not Google. But I still think there are a lot of businesses that would like to be Yahoo.”