Where Bartz Blew It And What Yahoo! Needs To Do Now

13 April, 2012

Carol Bartz was unceremoniously fired as CEO by the Yahoo! board last week. Fearing their decision might leak, the chairman called Bartz and fired her over the phone. Expeditious, but not too tactful. Bartz then informed the company employees of this action via an e-mail message from her smartphone and the next day, called the board of directors a bunch of doofusses in a media interview. Salacious fodder for the news media, but a distraction from fixing the real problems affecting Yahoo!

Unfortunately, the Yahoo! board seems to have no idea what to do now. A small executive committee is running the company which assures no bold actions. And a pair of investment banks have been hired to provide advice which can only lead to recommendations for selling all, or pieces, of the company. Most people seem to think that the value of Yahoo! is worth more when it is sold off in chunks than it is as an operating company. Wow, what went so wrong? Can Yahoo! not be 'fixed'?

There was a time, a decade or so ago, when Yahoo! was the #1 home page for browsers. Yahoo! was the #1 Internet location for reading news and for doing Internet searches. And it pioneered the model of selling Internet ads to support the content aggregation and search functions. Yahoo! was early in the market, and was a tremendous success.

Like most companies, Yahoo! kept doing more of the same even as its market shifted. Alta Vista, Microsoft and others made runs at its business, but it was primarily Google that changed the game on Yahoo! Google invested heavily in technology to create superior searches, offered a superior user experience for visitors, gave unique content (Google Maps is an example) and created a tremendously superior engine for advertisers to place their ads on searches or Web pages.

Google was run by technologists who used technology to dramatically improve what Yahoo! started seeing a future which would take advantage of an explosion in users and advertisers, as well as Web pages and Internet use. Yahoo! had been run by advertising folks who missed the technology upgrades. Its leadership was locked in to what is new (advertising) and they were slow with new solutions and products, falling further behind Google every year.

In an effort to turn the tide, Yahoo! hired what they thought was a technologist in Carol Bartz to run the company. She had previously led AutoCad, which famously ran companies like IBM, Intergraph, DEC (Digital Equipment) and General Electric-owned CALMA out of the CAD/CAM (computer aided design and manufacturing) business. She had been the CEO of a big technology winner so she looked to many like the salvation for Yahoo!

But Bartz really wasn’t familiar with how to turn an ad agency into a tech company nor was she particularly skilled at new product development. Her skills were mostly in operations and developing next-generation software. AutoCad was one of the first PC-based CAD products, and over two decades, AutoCad leveraged the increasing power of PCs to make its products better, faster and relatively cheaper. This constant improvement, and close attention to cost control, made it possible for AutoCad on a PC to come closer and closer to doing what the $250,000 workstations had done. Users switched to the cheaper AutoCad not because it suddenly changed the game, but because PC enhancements made the older, more costly technology obsolete.

Bartz was stuck on her success formula. Constantly trying to improve. At Yahoo! she implemented cost controls, like at AutoCad. But she didn’t create anything significantly new. She didn’t pioneer any new platform (software or hardware), nor any dramatically new advertising or search products. She tried to do deals, such as with Bing, to somehow partner into better competitiveness. But each year, Yahoo! fell further behind Google. In a real way, Bartz fell victim to Google just as DEC had fallen victim to AutoCad. Trying to Defend & Extend Yahoo! was insufficient to compete with the game-changing Google.

The board was right to fire Bartz, though. She simply did what she knew how to do and what she had done at AutoCad. But it was not what Yahoo! needed nor what Yahoo! needs now. Cost-cutting and improvements are not going to catch the ad markets, now driven by Google (search and AdWords) and Facebook (display ads). Yahoo! is now out of the rapidly growing market social media that is driving the next big advertising wave.

Breaking up Yahoo! is the easy answer. If the board can get enough money for the pieces, it fulfils its fiduciary responsibility. The stock has traded near $15/share for three years, and the board may obtain the $18 billion market value for investors. But "another one bites the dust," as the song lyrics go, and Yahoo! will follow DEC, Atari, Cray, Compaq, Silicon Graphics and Sun Microsystems into the technology history on Wikipedia. And those Yahoo! employees will have to find jobs elsewhere (oh yeah, that pesky jobs problem leading to 9 per cent-plus US unemployment comes up again).

A better answer would be to turn around Yahoo! Yahoo! isn’t in any worse condition than Apple was when Steve Jobs took over as CEO. It’s in no worse condition than IBM was when Louis Gerstner took over as its CEO. It can be done. If done, as those examples have shown, the return for shareholders might be far higher than breaking Yahoo! apart.

So here’s what Yahoo! needs to do now if it really wants to create shareholder value:

1. Put in place a CEO who is future-oriented. Yahoo! doesn’t need a superb cost-cutter. It doesn’t need a hatchet-wielder, like the old 'Chainsaw Al Dunlap' that tore up Scott Paper. Yahoo! needs a leader who can understand trends, develop future scenarios and direct resources into developing new products that people want and need. A CEO who knows that investing in innovation is critical.

2. Quit trying to win the last war with Google. That one is lost, and Google isn’t going to give up its position. Specifically, the just announced Yahoo+AOL+Microsoft venture to sell ad remnants is NOT where Yahoo! needs to spend its resources. Every one of these three companies has its own problems dealing with market shifts (AOL with content management as dial-up revenues die and Microsoft with PC market declines and mobile device growth). None is good at competing against Google and together, it's a bit like asking three losers in a 100m dash if they think by forming a relay team they could somehow suddenly become a 'world class' group. This project is doomed to failure, and a diversion Yahoo! cannot afford now.

3. In that same vein, quit trying to figure out if AOL or Microsoft will buy Yahoo. Microsoft could probably afford it but like I said Microsoft has its hands full trying to deal with the shift from PCs to Tablets and smartphones. Buying Yahoo! would be a resource sink that might possibly kill Microsoft and it’s assured Microsoft would end up shutting down the company piecemeal (as it does with all acquisitions). AOL has seen its value plummet because investors are unsure if it will turn the corner before it runs out of cash. While there are new signs of life since buying Huffington Post, ongoing struggles like firing the head of TechCrunch keep AOL fully occupied, fighting to find its future. Any deal with either company should send investors quickly to the sell post and probably escalate the Yahoo! demise with the lowest possible value.

4. Give business heads the permission to develop markets as they see fit. Bartz was far too controlling of the business units, and many good ideas were not implemented. Specifically, for example, Right Media should be given permission to really advance its technology base and go after customers unencumbered by the Yahoo! brand and organisation. Right Media has a chance of being really valuable that’s why people would ostensibly buy it. So give the leaders the chance to make it successful. Maybe then, the revolving door of execs at Right (and other Yahoo business units) would stop and something good would happen.

5. Hold existing business units' 'feet to the fire' on results. Yahoo has notoriously not delivered on new ad platforms and other products thus missing development targets and revenue goals. Innovation does not succeed if those in leadership are not compelled to achieve results. Being lax on performance has killed new product development and those things which are not achieving results need to stop. Specifically, it’s probably time to stop the APT platform that is now years behind and because it is targeted against Google and unlikely to ever succeed.

6. Invest in new solutions. Take all that wonderful trend data that Yahoo! has (maybe not as much as Google but a lot more than most companies) and figure out what Yahoo! needs to do next. Rip off a page from Apple, which flattened spending on the Mac in order to invest in the iPod. Learn from Amazon, which followed the trends in retail to new storefronts, expanded offerings, a mobile interface and Kindle launch. Yahoo! needs to quit trying to gladiator-fight with Google where it can’t win and identify new markets and solutions where it can. Yahoo! must quit being a hostage to its history and go do the next big thing! Create some white space in the company to invest in new solutions on the trends!

Of course, this is harder than just giving up and selling the company. But the potential returns are much, much higher. The predicament of Yahoo! is tough, but it has been a management failure that got it here. If the management changes course and focuses on the future, Yahoo! can once again become a market-leading company. Sure would like to see that kind of leadership. It’s how America creates jobs.


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Where Bartz Blew It And What Yahoo! Needs To Do Now

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