Yang Struggles To Reverse Yahoo's Fortunes

Poor Jerry Yang. It's not enough that he helped create Yahoo at a time when it set the pace for Internet email, search and aggregation. Now he has to fix the 12-year-old Web staple as if it were a big old media company struggling to transition to the next stage of interactivity--because it is.

You know you're an old media company when you over-deliver after under-promising on quarterly earnings, bumping up your stock price more than 8%. Just as quickly, that boomlet is overshadowed by analysts' long-term concerns and the blow-away returns of rivals (in this case, Google).

Yang and his management team, headed by Yahoo's able former CFO-turned-president Susan Decker, deserve credit for trying to make things look bette--for at least a quarter. Wall Street's hasty reality check was reflected in the title of the Bernstein Research report: "Yahoo: Long on Style, Short on Substance--Some Upside."

Industry analysts and investors intend to hold Yang accountable for allowing one of the Net's strongest initial brands to become stalled on the digital fast track. The only question is whether Yang is moving fast enough on the right fronts for Yahoo to recover and take off. Who knows?



If nothing else, Yang's struggle to reverse his company's fortunes (not much different under CEO Terry Semel's reign) is a stark reminder that big new media companies are as capable as old ones of miscalculating the needs and interests of connected consumers. Yang refers to Yahoo's transformation, since Semel's abrupt departure in June, as a new strategy: become consumers' starting point on the Internet, a "must buy" for advertisers, and a leading, open platform for developers. That's standard operating procedure for any major Net player. "So what was management doing before?" quips Bernstein's Jeffrey Lindsay.

Yang's comments to analysts and investors in an earnings call this week were generally about the need to better integrate assets and execute plans. He lacked new, compelling specifics. Yang and Decker also referred to a flurry of tuck-in acquisitions and strategic partnerships to take Yahoo email, search and video relevancy to the next level.

Efforts to put Yahoo back on track as a tech company--rather than a new-age media empire that Semel failed to produce--involves more work and less bottom-line results at this juncture. Despite Wall Street's heightened scrutiny of Yahoo's financial performance, Yang, a Stanford engineer, is striving to rekindle the company's early risk-taking innovation mandate. The loss of that entrepreneurial spirit has cost the company a bigger seat at the social-networking table and a larger slice of the $8 billion search ad market, about $6 billion of which goes to Google. All the same, Yang says he wants to position Yahoo to pursue $45 billion in global online advertising that he expects will swell to $75 billion by 2010.

Since Yahoo has never stopped nurturing organic innovation, and since Yang presided over the company at Semel's side, it is difficult to comprehend what internal changes mean long-term. More enterprising maneuvers with its content partners and sites would be a good place to start.

A closer look at "the composition" of Yahoo's improved third-quarter earnings, while "not reassuring" to analysts like Lindsay, reveal fundamental problems. Management concedes that the most recent display ad gains are unlikely to be repeated in the fourth quarter, due to nonrecurring items. Clearly, Yahoo's paid search improvements are unsustainable. The company's overall operating margins continued to slide to 11.7% from 30% of net revenues in 2005; its operating income is down 5.5% from a year ago.

While Yahoo beat low street estimates with its flat third-quarter earnings, it maintains flat full-year guidance based on almost no upside in its core ad business. Yahoo's third-quarter net income dipped to $151 million on $1.8 billion in revenues. Despite a 40% decline in international revenue growth last quarter, most of Yahoo's potential upside is in its minority stakes of independently managed Yahoo Japan, GMarket and Alibaba.

Goldman Sachs' analyst Anthony Noto says Yahoo's trends are heading in the right direction, although its fundamental appreciation is not compelling. Perhaps most troubling is that analysts generally remain cautious, with a consensus price target of about $33 share, due to the lack of visibility about the company's future growth. That is something you might expect for an old-line media company struggling through digital conversion--not a media player that has helped forge the Internet's double-digit growth platform.

Analysts have no clear sense of Yahoo's ability to maintain leadership in key gateway activities (such as email, search, video, and mobile) that drive all-important user engagement. Or to transition to both an advertising network and a seller of proprietary ad inventory. Or to achieve sustainable search growth with powerful affiliated business partners and its owned networks. Yahoo should be perched alongside Google, whose biggest challenge (its entry into display advertising and social networking notwithstanding) is managing its continued meteoric growth.

Yang is mum on Wall Street's general resignation that Yahoo must make dramatic moves to regain and sustain double-digit growth. Rampant speculation ranges from Yahoo having Google manage its search advertising business, to buying all or part of Facebook, to breaking itself up into pieces that would be worth more separately than what they are valued collectively. That's where more than 237 million unique users in 25 countries and 13 languages will get you if you falter too long in the Internet chase and lose your pioneering spark--just like too many other lumbering media and technology players.

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