Yahoo: Time for Act 3

With all the drama around Yahoo this month I’m glad I’m only watching from the sidelines. However things turn out, it’s certain that the company that emerges will be quite different from the one that has disappointed investors, employees, and, too often, users in recent years. Of course, the multibillion dollar question is whether the rapid changes will solve Yahoo’s problems or exacerbate them.

As to a Microsoft acquisition, if scarce resources were the problem—as they often are when early-stage companies are acquired—a buyout could be a solution. Microsoft’s market cap is close to double Google’s. But even in its current reduced circumstances, Yahoo has never lacked money or people to throw at perceived problems. Instead, the shortfall has been in identifying the best opportunities and efficiently deploying available resources to capitalize on them.

Perhaps Microsoft could help there, too. Despite some well publicized flubs no one doubts it’s fundamentally a well managed company with deep technical expertise. Unfortunately, though, history has shown Microsoft’s strength is in software, not media. There’s a huge question mark around the proposition that two companies with faulty radar and shaky track records could, if combined, somehow challenge the market powerhouse.

Yet it’s equally hard to picture the Yahoo that exists today turning itself around as an independent entity. The final tally isn’t in, but so far the names of layoff victims popping up on the web include few of the operating executives who have consistently failed—seemingly without consequences--to set coherent strategic agendas, execute against goals, and raise profits. Maybe bigger changes are coming, but Yahoo needs to understand that dramatic corporate transformation starts at the top, not the bottom. Getting rid of 1,000 mid-level functionaries might raise profits a bit but it won’t revitalize strategy, repair morale, kickstart innovation, or operationalize abstract theories.

If resurrection sounds impossible it’s worth recalling that Yahoo did it once before, in the wake of the dotcom meltdown. In September 2001 the stock bottomed out just above $4 per share (split adjusted), and a year later it dipped almost that low again. Then the price grew almost 10x over the next three-plus years; however, it’s been in fairly consistent decline (until the Microsoft offer) since January 2006.

I joined Yahoo early in the turnaround, in February 2002, and left in October 2005, just before the peak. Watching the company recover and grow—and then seeing the seeds of future failure begin to take root—was a vivid demonstration of management lessons I’ll apply for the rest of my career. Back in 2001 it was far from certain whether Yahoo would survive at all or become another dotcom casualty, the next Webvan or Pets.com. A raft of the company’s most senior executives departed and Terry Semel arrived in the spring of 2001 to launch Yahoo’s second act.

These days Terry’s name is typically associated with Yahoo’s recent decline, but back then he brought a bracingly fresh perspective: to focus Yahoo as a media business whose primary monetization strategy was advertising. Previously advertising was in the mix but the company was also drifting toward low-margin web services. Terry immediately went to work staffing up with media pros who recast Yahoo in a strikingly different and more business-centric mold than the original feel-good dotcom culture. Inevitably there were clashes between company veterans and the newcomers. Most of the time a good business case prevailed over tradition; after all, at that time we all felt that the very future of the company was at stake.

As Yahoo prospered the pendulum began to swing. We made acquisitions and didn’t do a good job of melding their benefits with our winning Yahoo culture. As revenue ballooned, managers became blasé about profits. For instance, a VP I reported to once told me the $10 million one of my projects added to the bottom line only amounted to a “rounding error.” I joined a lean company (2,000 employees in February 2002) where we product managers prided ourselves on efficiently producing the output of two or three people in traditional businesses. By the time I left the attitude had reversed and we were hiring two or three heads to cover work that should have been done by one.

Yesterday’s dotcom darling became today’s dog. Having a nontechnical leader at a technology company led to too much delegating and too many bad management calls. With his more traditional business background, Terry underestimated the pace of change and intensity of competition when you operate on “internet time,” an environment that magnifies the consequences of good and bad decisions alike. In the blink of an eye a competitor can not only surpass you but gain a shocking lead.

Yahoo got lucky a few times in the past but may have run out of rabbit's feet. The company that turned itself around six years ago was smaller and simpler, as were its competitors. The job market in those days was full of untapped talent after the dotcom downturn. In classical drama a comedy ends in a wedding, while a tragedy ends in death. It’s not clear how Yahoo’s third act will conclude, or whether there’s even much difference.