BUSINESS BLOGS
BUSINESS BLOGS
category: business
20 Sep 2007

I always tell people that to be successful at their respective professions, marketers need to succeed outside of Manhattan, programmers need to look beyond Silicon Valley and creators need to please audiences outside of Hollywood.

Outside of the 650 or 415 area code, everyone looks up to Yahoo! but that does not mean that Yahoo! does not have problems. What’s Yahoo!’s problem?

How Yahoo’s marketing execs could have let this double opportunity slip by is a mystery. That they did speaks volumes, and the implication is clear: Yahoo’s new leadership has not yet taken control of the company, and in the power vacuum, dozens of middle managers are busy pushing their own agendas.

Oddly enough, Wired is talking about Yahoo!’s presentation and gameplan for Tech Crunch 40. Incidentally, on the second day of the event, I was outside briefly doing a phone interview with The Deal’s David Shabelman, as I’ve done before, for his latest piece on Yahoo!

Dave and I touched on many things, and the biggest one was in fact exactly what Wired talks about (what I italicized). Somewhat surprisingly, David omitted that part, so I”ll mention them.

Yahoo!’s problem is 99% based on human resources and management issues.

- Product-wise, it has fantastic assets.
- Sales-wise, it is magnificently positioned to win in video and display/banner ads. Even its laggard search unit is a very respectable #2… and in the event it were to pull the plug on Panama and go with Google’s program, then it would materially boost revenue and dramatically cut costs, meaning its profits would skyrocket.

A Demoralized Workforce?

But, therein is Yahoo!’s problem. Suppose analysts ran the numbers and decided to do just that, can Panama and partner in search technology and/or search ads with Google, Wall Street would be jubilant but internally, morale would plummet. Yes, employees’ stock might benefit, but sarcasm and skepticism towards future projects would be a major issue. As such, while Yahoo! might be better off doing that in the short-run, in the mid and long run that is disastrous.

Adopt a Long Term View

Coincidentally, co-founder David Filo mentioned that all startups need to consider the long term impact of their actions. I certainly don’t think I was alone in the room to think of Yahoo!’s big mistake before the turn of the century when it decided to use Google’s search on its portal. It got warrants in Google, sure, but that is largely why today Google is worth 5 times more than Yahoo!

Wired is referring specifically to the fact that Yahoo! chose to showcase Yahoo! for Teachers and not Yahoo!’s Mesh, a new social network. Mind you, to me, it’s would have been a tossup, because

a) with Y! For Teachers, clearly they’re trying to compensate for missing out on Facebook, even though today Facebook is about much more than students.

b) there are way too many social networks out there, one more? Puh-lease.

Turf Battles and Fiefdoms

But what Wired adds, is spot on: “dozens of middle managers are busy pushing their own agendas.”

Ding-ding-ding… let’s backtrack: last year, when Brad Garlinghouse [indirectly] leaked the now-infamous memo to the press, it was 1/3 about a senior executive trying to fire up the troops but 2/3 about a senior executive trying to jockey for power.

Yahoo! attracts really smart people. To be fair, I also got to hear Mr. Garlinghouse at TC40 and seemed smart and a no-nonsense guy. But all of those smart people at the top spawn cynicism from the people on the front lines that actually get work done. Yahoo!’s headcount has swollen quite a bit, and I’d guesstimate that ’tis at the top that it’s fattest.

Because promotions and openings at the top are naturally rarer than at the middle or bottom, VPs, Senior VPs and Executive VPs will always spend large portions of their time and energy plotting for career moves instead of market share and revenue opportunities. Why? We know - from projects like Panama or acquisitions like Zimbra - that it takes years to convert tactical and operations move into tangible gains. As such, Yahoo!’s culture has probably created one of politics instead of meritocracy. That’s a major problem.

I’m not sure Jerry Yang or David Filo have what it takes to address that. Filo need not, though he runs technical things to a large extent. Yang, it should be noted, never had anyone report to him until this year. Re-read, and ask yourself if it makes sense for him to be seen as a likely CEO in the mid-run. It does not. As a Yahoo! shareholder I love seeing him run things, but I am concerned (were I a board member) about the likelihood that he will quit suddenly.

Yahoo! has to address this problem: good low-level employees and mid-level managers probably don’t want to work at Yahoo! because of this bottleneck at the top and because the stock has not moved.

Stock’s Caught in Rut

Ah yes, the stock

Yahoo! has been caught in a range of about $22 to $34 for some time now. Worst off, Yahoo! swings to the high end of that range have a lot to do with rumor whilst the dips to the bottom have to do with news and negativity surrounding all-things-Yahoo!

In my opening line, I mentioned that “I always tell people, marketers need to succeed outside of Manhattan, programmers need to look beyond Silicon Valley and creators need to please anyone but Hollywood,” but notice, I don’t share that sentiment about Wall Street, because in the blessed capitalism system, Wall Street counts, quite a bit. Companies are revered because of what they offer Wall Street, not what people on Main Street think about them. That is why Yahoo! will in fact be seen as a takeover target as often as it is thought of as a buyer of an asset.

This is a company that generated $6.4B in 2006 revenues, up 22% from the $5.2B 2005 figure, but its net income fell from $1.9B in 2005 to $750M. That’s not bad. There are many reasons for that, including R&D investment in Panama, and a bloated management rank on top.

$100B Market Cap If Executed Right

I’ve said this before, the choices for Yahoo! are bountiful, but the one that is probably best for shareholders is to sell to a private equity firm.

The deal would also prove lucrative for the PE firm, in our analysis, just by maintaining its grip with regards to market share in online advertising revenue, Yahoo! could be worth $100B by 2010.

According to our analysis:

Yahoo! could be generating revenues of $9 to $18 billion in 2010; its profit margin was 24% and 36% in 2004 and 2005 respectively.

Say it can maintain margins of 25% (hey, they won’t be hiring as aggressively as Google and there is only so much purple paint out there), this means that it can be generating profits of $2.5 to $5 billion per year, at a P/E of 25 (it’s now at 33 today), that’s a market cap of $62.5 billion to $125 billion in 2010, or an average of $93.75 billion.

With those kinds of revenues and margins, it will have more than $10 billion in cash, so a market cap of just over $100 billion.

Will any of this happen? Probably not, but if it doesn’t, it might have more to do with what Wired stated (”Yahoo’s new leadership has not yet taken control of the company, and in the power vacuum”), and not the opportunity at hand…

Disclaimer: I own shares in YHOO