Tuesday, November 18, 2008

What's Next for Yahoo?

After Jerry Yang, Yahoo may need to rethink its strategy.

By Erica Naone

Credit: Technology Review

Late on Monday, Yahoo announced that Jerry Yang would step down as CEO of the troubled Internet giant. The company's shares were trading up more than 11 percent on Tuesday morning following the news, but with ad revenue declining and after several rounds of layoffs, Yahoo still faces a major challenge to turn its fortunes around.

Yang, who cofounded the company in 1994 and returned to serve as CEO in June 2007, will move back to his previous role as "Chief Yahoo" and remain a member of the company's board of directors. He steps down after a hard year for Yahoo and decisions that helped heap pressure on him as head of the company.

This January, Yahoo rejected a buyout offer from Microsoft, which had offered $31 a share ($44.6 billion), a decision that proved unpopular with some shareholders and led to a protracted battle for control of Yahoo's board. The company then looked to an advertising deal with Google for help resuscitating its business, but Google walked away earlier this month when it appeared that such a deal could lead to an antitrust lawsuit.

Yang's departure may well reopen the way for a deal with Microsoft. Without such an agreement, Yahoo will be hoping that the open technology strategy spearheaded by Yang as CEO pays off as other companies make money from using its platform to develop new Web tools and software.

In the past year, Yahoo has bet heavily on an open strategy that the company credits Yang with creating. The idea is for Yahoo to open many of its tools, including its search index, to other companies and to share in revenues earned from the use of those tools. Yahoo also has plans to organize its disparate properties into a "single social platform."

Andrew Frank, a Gartner Research vice president, believes that Yahoo has a chance to salvage its fortunes using such an approach. Despite recent negative news, he notes that the company still makes money and still has a large and loyal audience. Frank says that he thinks the open strategy is the right one for Yahoo in the long term: "Yahoo's fortune, for better or for worse, is largely connected to the fortunes of open platforms and open companies on the Internet, from a technology standpoint."

But other experts are more skeptical that Yahoo can make the strategy pay. "I think the open strategy is on trend, as they say," says David Card, vice president and principal analyst at Forrester Research. "A lot of people are creating more and more APIs [tools that open a Web service to outside developers]. It's acknowledged to be the way you do business, especially if you're not the leader."

But Card adds that Yahoo must ultimately decide whether to maintain core services such as search or social networking--a task that is becoming difficult in the face of competition--or to more substantially open up popular properties, such as Flickr and Del.icio.us, to other companies, and create similar new niche services--a choice that would be humbling for the portal company. Card adds that Yahoo's current situation might be helped if the company continues to invest heavily in mobile, an area where no company has yet achieved dominance.

Considering how much the company has invested in developing new open systems such as Build Your Own Search Service (BOSS), Frank questions whether new leadership will shift the company away from this direction. Yahoo's biggest problem in the short term, he says, is the market's shaken faith in the company. Open projects may have to go on the back burner while the company works to appease investors, perhaps by inking partnership deals, or even agreeing to be acquired.