Some Thoughts on Yahoo

Yahoo has been in the news again recently, ostensibly because its board is considering two new options for fixing the company: replacing Marissa Mayer as CEO and selling off what most people still think of as Yahoo itself – its US-based internet business. All of this raises lots of questions about how Yahoo got to where it is today, whether Mayer really has done as bad a job as some people think, and whether there’s any way to actually turn the business around at this point.

A poisoned chalice?

There’s definitely an argument to be made that the CEO role at Yahoo when Marissa Mayer took over was a poisoned chalice – in other words, no one could have succeeded in turning the company around. The brand itself appears to belong to a previous internet era, associated with Yahoo’s early dominance of the directory/search business and a variety of other domains, rather than any present prominence. Like AOL, Mapquest, Hotmail, and other brands, Yahoo is likely a name or service many of us used to use but have long since abandoned. How can you turn around a brand that has that much baggage?

Still a top Internet destination

However, for all that the Yahoo brand may feel dated and tarnished, it’s one of only a handful that still touches a majority of the desktop internet audience in the US every month, along with Google, Facebook, and Microsoft. For Google and Facebook, that audience is the basis of multibillion dollar businesses that are growing rapidly and hugely profitable. Shouldn’t Yahoo be able to build a business with similar financial characteristics?

In the wrong part of the online ad business

The biggest barrier to Yahoo’s ability to better monetize its online audience is it’s in the wrong part of the online ad business. Almost all of Yahoo’s properties are only really suited to traditional display advertising – banners, sidebars and the like. Meanwhile, a great deal of online spending is going to several key areas where Yahoo is essentially unable to play: search advertising (where Yahoo has been hamstrung by its deal with Microsoft), mobile native display advertising of the kind offered by Facebook and Twitter, and video advertising (which requires a compelling video offering to begin with). Stuck in traditional display advertising, Yahoo has suffered from all the negative trends impacting that space, while its exposure to search is too marginal to make a meaningful difference in its performance.

When Mayer first arrived at Yahoo, it appeared she was going to try to remake it in Google’s image, with stronger search and video plays to match Google’s strengths in those areas. But it’s taken years to extract Yahoo even a little bit from the Microsoft agreement and, even after its deal with Firefox, it has a tiny market share. In video, it’s tried and failed to acquire DailyMotion, a much smaller YouTube clone, while dabbling with marginal video offerings like its NFL games and acquiring a season of Community (an investment it’s since written off). At the same time, Mayer has made dubious investments in online “magazines”, in Tumblr (which suffers from the same fundamental problem with display advertising), and other areas that have served more as distractions than strategic advantages for the company.

A lack of differentiation – and innovation

One of Yahoo’s biggest challenges is it has failed to differentiate itself in a meaningful way. Yes, it has these huge audiences, but many of them are around properties that are essentially indistinguishable from competing properties and easily substituted by them. If Yahoo News, Sports, Email, or other core services went away tomorrow, users could easily jump onto equivalent ones offered by others. Yahoo has also suffered from a lack of true innovation – yes, it has launched a number of new and interesting products and services over the last couple of years, but these have almost all been “me-too” type products, piggybacking off the innovation of others. Just this week, it announced a messaging app which borrows from many of the features found in other apps, several years after it became clear messaging was a hot space. Yahoo has invented nothing new during Mayer’s tenure while investing ever more heavily in things that others already do well.

Can Yahoo be saved?

At this point, Yahoo is losing money every quarter (margins have plunged into the red since Mayer took over), although revenues are now growing a little again, following several years of decline. The biggest problem is Mayer doesn’t seem to have changed her strategy at all, despite all the failures outlined above. Given the extent to which the members of the current board were appointed during her tenure, there seems little likelihood she’ll be ousted anytime soon. But there’s also little sign things will go differently from here on out compared with how they’ve gone so far under her leadership.

Is it possible to save Yahoo? It’s likely it will only be if it’s stripped down and built back up again in a way that is organized around properties that can really drive growth and profitability for the company. That means stripping out a lot of stuff that’s popular but not generating profits and spending some significant money investing in new growth areas. All of that means taking the company private may well be the best option, giving the company and its leadership some breathing room while they take on the bigger task of truly transforming the business. If the core part of Yahoo really is going to be spun off, an acquisition by a private equity fund might well be the best option.