• by Diane Mermigas , February 1, 2008

Yahoo is starting to act like some old media players. It is helplessly bogged down in restructuring and refocusing strategy, missing Wall Street expectations, and dodging the perils of an economic downdraft. Its stock has fallen through the $20-a-share threshold that makes it a prime takeover target. Half of its diminished $25 billion market cap is investments in other public companies.

Gone is the growth momentum and can-do spirit that are hallmarks of new media players. The biggest new media company to fall off the cyber jet stream has investors asking, what's an Internet giant to do? Absent the skilled execution of a dynamic turnaround strategy, some analysts say it is time for Yahoo to sell. Microsoft is a logical buyer; Time Warner would be a surprise, and News Corp. would not. At this price, any conglomerate or private-equity group could jump in. With margins in a free-fall and no clear revenue implications of its investment spending, Yahoo is perceived as "a value trap," says Oppenheimer analyst Sandeep Aggarwal.

Yahoo's predicament is as much psychological as it is financial. It is in danger of being considered just another content aggregator, search engine and big media company gone astray. All the elements that have frequently defined old media were part of Yahoo's fourth-quarter earnings. Declining operating income, due mostly to losses from the restructuring of its AT&T broadband deal and the increased cost of building its ad business, leaves Yahoo no alternative but to cut 7% of its 14,300 workforce, according to Bernstein analyst Jeffrey Lindsay. A "strategic workforce realignment" may come later.

"A restructuring" has been in the works since Yang assumed command from Terry Semel a year ago, promising a 100-day review and revised game plan, which have yet to be delivered. The growing impression is that Yahoo's parts may be worth more than the whole, although its equity stakes in Alibaba and Yahoo Japan have declined 28% and 40%, respectively, over the past two months.

Like so many traditional media companies, Yahoo is showing signs of susceptibility to the economic downturn. Its display business resembles television's traditional sales force-sold, CPM-based brand advertising of guaranteed impressions. Its affiliate advertising revenues were down 13% last quarter.

Providing a current-year outlook that is below analysts' expectations and a sharp decline in fourth-quarter net profits was uncommon for any major Internet player. Yang's comments on how to survive tough times sounded like something out of a Big Media CEO's playbook. "While we continue to face headwinds this year, we believe the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow in 2009," he told analysts.

Even so, Yang said Yahoo is taking "an aggressive investment posture" in its core businesses, although some investors suggest the company would be better off buying its way into improved revenues by adding news-enhancing services like Digg and Techmeme, or partnering with Technorati in blog search. Yahoo also should be integrating more social network and more advanced mobile device applications to its core services. Increased internal spending and declines in its affiliate revenues prompted Jordan Rohan of RBC Capital Markets to reduce his 2008 earnings estimates by 12%. Other analysts say the company's long-term growth rate is 10%, at best.

Yet, there was some heavy-duty griping from CEO Susan Decker about audience measurement and how comScore was not accurately reflecting Yahoo's double-digit page growth in unique users and page views. Yahoo plans to use visits to its global starting points and anchor sites as its main metrics in the future. Decker's comments put Yahoo in the company of many broadcast and cable networks companies, whose fortunes rise and fall on the inexact science of estimating viewers.

Like so many embattled media executives, Yahoo's top executives are assuming a no-comment stance; it may respond to email and text questions. When in doubt, don't communicate. When you do, be vague. Consequently, Yang and the gang should be dealing with some fairly irate activist shareholders by their next quarterly earnings call. "Before recommending the stock to investors, we would like to see some evidence of this management team's ability to execute and realize the inherent value of the assets," estimated between $39 and $45 per share, Lindsay said.

The biggest concern is that Yahoo has lost its mojo. Like other big media concerns, Yahoo could spend too much time and money reshuffling the deck and playing balance-sheet Monopoly buying and selling pieces. It may not spend enough time building on its huge Internet advertising and search businesses or improving display and paid search advertising--up by 20% and 30%, respectively, in the fourth quarter.

Then again, Yahoo may be loath to reverse its fortunes due to its management committing the biggest sin: losing credibility with investors. At least Yahoo can consider itself in good company. You need two hands to count the other big media companies that heard the same drumbeat on Wall Street in recent years--and did nothing.