• by Diane Mermigas , January 22, 2008

Although slipping in its rank as one of the most popular places on the Internet, a $28 billion search engine with 136 million users should not be an albatross in a time of booming interactivity--but Yahoo is.

That is the dilemma for Yahoo's founding CEO Jerry Yang. He is struggling to breathe new life into the 14-year-old portal born of the Internet age with the smart, lean elements that old-line media companies are desperate to grasp. Yahoo was one of the first cool new media players to fuel mass email and Internet use. I recall a visit to the Sunnyvale, Calif. campus years ago when an upbeat Yang told me the sky was the limit.

Today the sky is falling.

By Yahoo's Jan. 29 earnings report, Yang could announce 1,500 to 2,500 layoffs being demanded by Wall Street in a move that mirrors the cost-cutting moves of bloated established media. It is eliminating failed services, such as Yahoo auctions, photos and Yahoo 360--an extraordinary failure, considering the big foot Yahoo has in the door of increasingly important social networking.

Some of the potential solutions are not what you'd expect from a leading Internet player. Many suggest that Yahoo should outsource its search to rival Google or Microsoft, an act of capitulation that would be acceptable if Yahoo turned up its creative juices elsewhere. The combination of layoffs and search outsourcing could bolster revenues by 40% and nearly double Yahoo's trading price to close to $40 a share, some analysts say.

The 20% headcount reduction, operational streamlining and elimination of redundant and failed businesses should restore nimble decision-making and innovation. They reflect the moves called for in the "peanut butter manifesto," an internal memo authored by Senior Vice President Brad Garlinghouse more than a year ago. Most frustrating is how long it has taken for these long-overdue changes to materialize. And the delay has proven costly.

Conversely, it hasn't taken long for new media to become more like old media in so many troublesome ways. Having lost its momentum, Yahoo now is faced with revitalizing its portal, advertising and Internet search businesses to retain its still formidable user base--a fast-unraveling quandary that first settled on AOL four years ago.

Perhaps the most shocking evidence of Yahoo's need for major structural change came when Bernstein Research analyst Jeffrey Lindsay pointed out that Yahoo equity holdings and cash are collectively worth more than its core businesses. Having been a far better judge of its international investments than its own domestic affairs, Yahoo might do well to borrow a page from the crafty playbook of John Malone, the chairman of Liberty Media--celebrated for creating shareholder value in complicated ways. Its more than $11 billion equity stakes in Yahoo Japan and Alibaba, a Chinese commerce group, could be spun off in a tax-free move to Yahoo shareholders. The new entity could be a player in international deals with Chinese search engine Baidu.com and others, according to Lindsay.

Stateside, Yahoo is ailing from a stunning lack of hallmark vision and game vitality that it first brought to the Internet party. Instead of tapping his inner entrepreneur for new spirit and ideas, Yang referred to himself in his recent Consumer Electronics Show keynote as "the same old face," just six months after reclaiming the CEO job from former film studio chief Terry Semel.

By improving the interface with more third-party Web sites and applications, and layering in more inventive utility and function, Yahoo says it longs to become users' main communications and connections hub. It wants to be more relevant, simple and efficient--especially on portable connected devices, Yang said at CES. Some of the intriguing improvements will take a while to materialize, and Yahoo already is facing stiff competition from MySpace, successfully and gingerly being reshaped into a contemporary content and commerce-driven social network.

That is why rumors persist that cash-rich Microsoft may try to acquire Yahoo or seek to merge their search engines to create a search advertising and monetization giant that can compete with Google.

This is the second time in recent years that a major Internet portal has fallen on hard times, although Yahoo generally is still stronger and more successful than Time Warner's AOL. Worse, there are no clear indications that any other company would know how to adequately improve the performance and unlock the potential of either Yahoo or AOL. That has moved Lindsay to declare that a potential Microsoft-Yahoo union would be a "value-destructive" idea for both players.

Even as AOL regains its footing and Yahoo strains to steady its course, the most perplexing conundrum is why the Internet's early flaming creations can't get their mojo back. And where is the front line of next-generation online crusaders to take their place?