Yahoo's last hurrah

Monday began the final act of Yahoo, as it announced the purchase by Verizon of its traditional business for $4.8 billion. The WSJ noted

The sale doesn’t include, among other things, Yahoo’s cash, its shares in Alibaba Group Holding Ltd., its shares in Yahoo Japan, and Yahoo’s noncore patents, called the Excalibur portfolio. These assets will continue to be held by Yahoo, which will change its name at closing and become a registered, publicly traded investment company.

Also excluded was the Excalibur patent portfolio (excluding patents purchased by Verizon) valued at $1 billion.

At the close of business Monday, Yahoo’s market cap was $36.4b, suggesting that these residual assets are worth about $32b — or 6.5x as much as Yahoo’s traditional businesses. (It seems misleading to call 13% of the company’s value “core”). TechCrunch values the Alibaba and Yahoo Japan shares at $31.2b and $8.3b so something doesn’t add up.

The bible of Silicon Valley, the San Jose Merc, says the market cap of Yahoo is about where it was before 2008 market crash. USA Today says that CEO Melissa Mayer had the best outcome (as measured by share price) of the six CEOs of Yahoo’s 20 years as a public company. Her 152% stock price increase made up about half of the stock value lost by (interim) CEO Jerry Yang, who held the reins during the heart of the stock market crash. The 152% increase compares to the 175% rise in the NASDAQ composite index during the same period.

Yang had a chance to sell the company to Microsoft in 2008 but refused to do so; in response, I said “Yahoo is toast.” As with other tech stocks, whether you made money over the past few years depends on whether you bought at the bottom or near the top.

Still, crediting Mayer with the stock price increase over the past four years seems somewhat generous, given that the “traditional” business continued to decline in value. Instead, (as predicted) the increase came from the two strategic investments by Yang in Alibaba and Yahoo Japan.

Under the circumstances, things turned out better than feared. Over the last four years, Yahoo was no Google, Apple or Microsoft — let alone Facebook — but at least it is a positive outcome during a period when other mature tech stocks declined.

Mayer will be moving on, but hopefully (as with Verizon’s acquisition of AOL) many of the Yahoo employees will keep their jobs. The Yahoo company (if not the brand) will be disappearing, but given its waning interest, the backing of America’s most profitable (and second most valuable) firm will provide reasons for potential partners to take it seriously again.

Past time to liquidate Yahoo

After turning down Microsoft’s $31/share purchase offer four years ago, Yahoo shares quickly gave up 25% of their value. Since the post-crash recovery began three years ago, the NASDAQ index is up 80% while YHOO has gone exactly sideways at $15. (Another well-down Silicon Valley search company is up 55% during the same period, while a large Redmond-based software company is up 60%.)

Today Yahoo forced out their controversial CEO Scott Thompson, agreed to put 3 (of 4) of Daniel Loeb’s dissident director nominees
on the board, and appointed a new interim CEO, Ross Levinshohn.

The only thing that seems to be supporting the stock are its 33% stake in Yahoo Japan and 40% stake in Chinese search company Alibaba. Thompson was apparently working on selling these stakes to raise money.

So far in the past 5 years, the company has had a string of mediocre, inadequate or just plain terrible CEOs: Terry Semel, Jerry Yang (who turned down Microsoft), Carol Bartz, interim Tim Morse, Scott Thompson and now interim Ross Levinshohn.

Loeb has been proven correct in his criticisms of Yahoo. And due the mistake in hiring Thompson without checking his resume, Loeb he has succeeded in getting the board seats where Carl Icahn failed.

Yahoo is now worth 7% of Microsoft and 9% of Google, and the trend of the past five years has been layoffs rather than growth. Its days as a stand-alone company are long since over. The company should be wound down for the best possible price, but since Bartz sold the company’s birthright to Microsoft, it seems unlikely to be able to start a bidding war for all but its most marginal properties.

Creative destruction creates carcasses

Veteran tech journalist Therese Poletti this morning looks at the tough choices facing the new(ish) CEOs of three established tech companies. The double-deck headline in Marketwatch says it all:

April 3, 2012, 12:01 a.m. EDT
Can new CEOs fix H-P, RIM and Yahoo?
Commentary: H-P has best hopes, future grimmer for RIM and Yahoo

She begins the story by quoting Clay Christensen from his talk last week at Xerox PARC — a nice touch and obviously a point of view I wholeheartedly endorse.

But then she gets to the money quote:

Once companies have lost their edge, can they ever climb back? In the case of H-P, RIM and Yahoo, the outlook appears to be the best for H-P, worse for RIM, and Yahoo could eventually just be sold, or cut up into bits.

“They have moved to the carcass phase of the business,” said Stephen Diamond, an associate professor of law at Santa Clara University. “That is a very bad sign. That is very interesting for lawyers and vulture funds. But to expect those companies to turn around technologically is all but impossible. H-P may have narrowly averted that,” he said, adding that he believes the tech giant needs to eventually find a more visionary CEO with more tech or engineering creds, or it too will lose its way.

Carcasses? Ouch!

The pessimism on Yahoo seems conventional wisdom. Yahoo was listed among “four dying companies” over three years ago, and the other three have essentially been carved up: Palm bought and essentially killed by HP, Sun swallowed up by Oracle for its patent portfolio, and AMD making a bold (i.e. risky) shift to a fabless/outsourcing model.

Meanwhile, the travails of RIM and HP have been well chronicled. All three companies are at a point — as Apple was in the mid-1990s — where their troubles are so great that they have trouble attracting a top tier CEO. In offering the most optimistic view of HP, Poletti sees CEO Meg Whitman as a savvy corporate politician and transitional figure, who sets the ship aright but then turns to the reins over to a technologist (possibly inside) leader.

This plays to a conjecture I’ve been trying to nail down for my book on engineering entrepreneurship: great technology companies have to be led by great technologists. (Steve Jobs might be an exception to this rule, but he was an exception to nearly every rule).

Still, these are companies that have hit a difficult time, having lost (or in the process of losing) their once certain moneymaking franchise to commoditization and other market turmoil created by creative destruction. As Prof. Christensen notes, this is the inevitable way of the technology-enabled world.

Cutting their way to greatness

A company in a downward spiral can never cut its way to greatness — and rarely even to survival. Yes, it should throw losing products and divisions over the side, but in the end, it will never survive unless it can find some profitable core operations — and continue to build and build upon those operations.

Two examples come to mind. During a run of miserable CEOs, Yahoo was cutting left and right but not building anything. Now Carol Bartz has defined the core focus of Yahoo as a consumer media company. Who knows, it might even work, but at least it’s a plausible shot at turning around a company that’s fallen long and hard.

The other example is HP, which made a wrenching (but successful) shift from an innovative company to a cost-cutter, as designed by Carly Fiorina and implemented by Mark Hurd.

Washington Examiner contributor (and law school professor) Glenn H. Reynolds offers a counter-example of how not to do it, using a once-storied beer brand: Schlitz.

When I began drinking in college — the pre-Jimmy Carter drinking age was still 18 — the word “Schlitz” had become synonymous with swill. The epitome of this was a fellow Baker House freshman who was so cheap and so intent on getting blitzed on weekends that yes, he’d even drink Schlitz. (Today I can’t even finish a Coors, let alone a Bud — give me a Firestone IPA.)

But apparently Schlitz was once a premium beer. Reynolds explains its self-inflicted slide into oblivion:

Schlitz was once a top national brew. But, in search of short-term gains, it began gradually reducing its quality in tiny increments to save money, substituting cheaper malt, fewer hops and "accelerated" brewing for its traditional approach.

Each incremental decline was imperceptible to consumers, but after a few years, people suddenly noticed that the beer was no good anymore. Sales collapsed, and a "Taste My Schlitz" campaign designed to lure beer drinkers back failed when the "improved" brew turned out not to be any better. A brand image that had been accumulated over decades was lost in a few years, and it has never recovered.

The rest of Reynolds’ column would probably raise hackles here in Silicon Valley — a small government criticism of the Federal government’s self-inflicted damage to its own credibility and legitimacy.

Still, Schlitz provides a great lesson illustrating a key point I teach my students about strategy: make your strategic choices internally self-consistent.

Penny-pinching for a premium brand can be done — as Apple did in the late 1990s, when it fixed its production and supply chain cost disadvantages. However, it’s always a tricky combination to pull off. The only two ways I’ve seen it work is to do what Apple did (favor quality over cost), or what HP did (accept commoditization and switch to a generic low cost strategy).

Stopping others from Christmas evil

One of the functions of free markets is to provide private governance. Self-regulating markets reward good products and services and punish the bad.

However, sometimes buyers don’t have enough information to make good choices. In response, entire companies arise to correct this lack of information — stereo magazines, camera magazines, Consumer Reports, etc. etc. Intermediaries are also supposed to play this role. Reputable retailers, wholesalers and distributors select reputable products and stand behind them.

Of course, this is all fine in theory, but often breaks down in practice. The self-regulators (like government regulators) get lazy, corrupt, or just make a mistake.

And then we have advertising. TV and radio stations accept ads for weight loss programs, male enhancement herbal supplements, and all sorts of products where the “too good to be true” probably is.

All of this being a roundabout way of asking: How much of an obligation does Google have to reject fraudulent ads? Does its promise to “do no evil” require it to avoid complicity in the evil of others?

Do we expect more or less out of a search engine than a TV station, TV network or the New York Times? Does its market dominance give it special obligations?

To me, the Google business model makes it uniquely vulnerable to this problem. Its primary ethos of making its business scalable with no human intervention — and thus no human judgement — seems to be devoted to doing as little governance as possible.

From what I’ve seen thus far, it’s Insulted — and fights back— if the SEO crowd games its algorithms, going so far as to misappropriate the e-mail term “spam” to tar such efforts. It has also taken steps to block searches that lead to malware sites.

However, it seems to be less intent on blocking companies that pay for ads, and then use the traffic generated by those ads to perpetuate age-old examples of deceptive business practices.

All this came up earlier this month when I was Christmas shopping (for myself). My digital SLR is almost 10 years old. My wife and I have been talking for several years about replacing it because the CPU is too slow to take bursts of pictures of our daughter at sporting events.

Back in February, I’d identified the Nikon D60 as the likely replacement, and so I google’d “Nikon D60”. This gave me a lot of paid links to firms offering to sell me a camera, and links to sites offering me pointers to the best prices on a camera.

Virtually all of the sites that I found directly and indirectly were dishonest to some degree: they had no intention of selling me a D60. (The one exception was Amazon, which would be glad to sell me one today).

The problem with the search is that since my research in February, Nikon discontinued the D60 and replaced it with the D3000. So when Target bought an ad for my search, they were gambling that when I came to their site, I’d buy another camera. A few other reputable companies did the same thing.

After that, what was left was companies that had no intention of selling me a camera. Some of these advertised directly, some were listed by a site called Compare247.us and some were even listed by a shopping.yahoo.com search that showed up.
Going to these sites gave me many examples of “too good to be true” prices — because they were. This reminded me of college days when some of the ads in the back of Popular Photography were for reputable mail-order camera stores like Adorama, B&H, Executive and 47th Photo, but among the remainder were companies that were not selling what they advertised or would out-and-out rip you off. (Pop Photo had specific policies for reporting such problems, and over time seemed to weed out the worse offenders).

It turns out that a UC Berkeley alum named Dave Michael (possibly a pseudonym) runs a blog devoted to rooting out fraudent camera website “deals.” (Alas, to monetize all the traffic he’s getting, he created a separate blog plugging good camera prices that he sees on Amazon.)

So when I went to investigate what was known about these “too good to be true” prices, I kept finding Dave’s website, with articles talking about why these sites are dishonest and full of user comments about their own bad experiences. This included postings on Supreme Camera, SmartChoiceCameras.com, Thunder Cameras, and Need4Digital.com. All of these were mentioned by Google or comparison sites linked by Google.

Although Google is the biggest offender, it’s not as though its competitors are blame free. Yahoo Shopping also sent me to Supreme Camera and Need4Digital.com. In fact a Yahoo search for “Nikon D60” this morning (Dec. 24) found another paid ad for Need4Digital.com.

With its billions, Google can’t claim they don’t have the resources to investigate complaints. However, their AdWords complaint process seems to worry about other types of problems. For example, if a competitor is clicking on your page to inflate the commission you pay, Google offers advice on how to report “invalid clicks.” In fact, Google’ing “fraud” on the AdWords site talks about this so-called “click fraud,” not AdWords sites that are fraudulent.

Dave’s site has apparently come to the attention of state and local regulators who have been using it to shut down the most obvious frauds. He has also asked Google why they are not doing more. On October 28, he posted this plea on his blog:

Dear Google: Despite the State of New York’s crackdown, the bait and switch websites continue to pop up, and they use Google Adwords to lure unsuspecting Internet users into their fraud. With that in mind, I have an offer. Why don’t you flag all new applicants to your Adwords program that plan on advertising either cameras or camcorders, and then do some research. If they are brand new, put them on probation. Heck, send me their names and I’ll research them for free. In the long run, it’s better for Google not to let these guys use your service to commit fraud.

So in the end, what responsibility does Google bear for the dishonesty of its advertisers? How much effort should it exert towards rooting it out?

I think it can and should do more. If that means paying actual human beings to investigate the most egregious cases, then so be it.

Who owns communities?

While online communities are an important source both for innovation and also for Internet users to gain value from Web 1.0 and Web 2.0 websites, many of the rules for such communities are still up in the air.

Physical communities have a lot of rules and conventions. Certain forms of political activity are legal on private property. Newspapers like the New York Times doesn’t print every letter critical of the newspaper, but it (and its local counterparts) will normally print some critical letters of the sort it deems appropriate.

Wednesday, Yahoo’s chief marketing officer Elisa Steele proclaimed the new Yahoo! will be much more customer focused. (Frankly, I can’t tell yet whether this is a real change or just marketing hype). It pointed to the new website design as demonstrating this principle.

In response, Thomas Hawk (a hardcore Flickr user with 29,000 photos and counting) wrote a response asking whether Flickr (and thus Yahoo) planned on ending various forms of overt and covert censorship. This is part of his ongoing fight against Yahoo/Flickr censorship.

Other websites such as MSNBC and Silicon Alley Insider have remarked on examples of Flickr censorship. A few have even claimed that the photos site is helping the Obama administration in exchange for a recent government contract that also included YouTube.

At one level, I want to say “If you don’t like the terms, don’t use them.” However, with 29,000 photos uploaded, the switching costs are pretty high.

This also reinforces my observation (as noted more eloquently by others) that Web 2.0 is a lot less open than Web 1.0, if for no other reasons than the high switching costs of proprietary SaaS systems. In Web 1.0, you can upload and download HTML and JPEG files to any ISP that you want, whereas for Web 2.0 — and other SaaS — your data is often more captive than in a Microsoft Word proprietary file format.

But in the end, I think this points out the immaturity of online communities — or the arrogance of dot-com community owners — in setting the rules of community engagement. The newspapers (and usually TV and radio stations) realize that the presumption must be for openness and free speech to have any sort of credibility and legitimacy among public participants.

Some websites also recognize such a need for openness. Google provides free web hosting for blogspot, which allows me to call out Eric Schmidt’s hypocrisy, its lobbying efforts and its ongoing push for total world domination. Yes, my blog doesn’t have the Google brand but still this is a form of openness that Flickr appears unwilling to provide.

There is also the huge concern (near the bottom of Hawk’s list) that photo site users have for how reliably their content is stored. If people use a free service, then of course they get what they pay for. But if they do pay for the freemium upgrade, then users have a reason to respect a certain level of reliability that seems to be disclaimed in the Terms of Service.

Perhaps I’m just atypical, i.e. this freedom stuff is more important to me than the average Internet user. I spout off on a blog and used to spout off as a newspaper reporter and columnist. In my choice of residence, I’ve made a point of never buying (and only briefly renting) any home that has CC&Rs, Mello Roos or other HOA-type restrictions — so that I can raise a flag or hang out my laundry without fear of micromanagement by the HOA nazis.

However, I think even the average American will expect a certain amount of transparency and due process if they are to participate in a privately-controlled online community. Major companies have gradually developed real processes for DMCA takedown notices, and other issues deserve a similar balanced approach that’s more fair than, say, stockbroker arbitration.

If I were a frustrated online community member, I’d take my gripes to TRUSTe and try to convince them that they should include some sort of standards for due process in removing content from registered members, and notifying them of the reasons why and a mechanism for appeal.

Yahoo's last hurrah?

AP has a good article on the long-delayed Microsoft-Yahoo search agreement. (Great title on Yahoo Tech: “Microsoft, Yahoo team up to ding Google with Bing.”)

Yahoo gets no up front cash, but gains incremental revenue and reduces search R&D. (It’s not clear if the claimed $500m increasing in operating profit includes the R&D cuts).

Many commentators say Microsoft got the better end of the deal. Perhaps the most colorful analysis comes from Jason Calacanis, founder of Silicon Alley Reporter in his Business Week column:

Yahoo committed seppuku today.

The once-proud warrior of the Internet space laid down its sword, knelt at the feet of Microsoft, and gutted itself today. There was no honor in this death: It was brought about by the shame of losing to Google and a lack of faith in its ability to compete in the space it created. To be clear, Yahoo didn't need to do this deal; Microsoft did. Ultimately Yahoo will look back at this moment as the second—and perhaps fatal—mistake in its epic history.

(Of course, the bigger mistake was helping Google get established in the first place).

Clearly Yahoo’s bargaining power and stock price are far lower than when it turned down Microsoft’s various acquisition offers. He who hesitates is last (and lost). In this case, Carol Bartz is paying the price of the indecision of her predecessors, both Jerry Yang and Terry Semel.

Yahoo deserves a break today

One of my Twitter friends, Nilofer Merchant, recommended a good column of advice to Carol Bartz on how Yahoo can revive its struggling brand.

The column by Nicholas Carlson offers examples from McDonald’s, Harley-Davidson, Gucci and Apple. Given industry fit, the first one on its face seemed the most improbable:

Stoke employee passion with promises of upward mobility. McDonald's CMO Larry Light has a new book out called Six Rules for Brand Revitalization. It's about how McDonald's went from a stagnant brand in the the 1990s to the once-again-growing powerhouse that it is today. It's full of groan-worthy business book jargon like "the eight P's."

One lesson from the McDonald's turnaround is very relevant to Yahoo, though. Back when Larry joined the company, McDonald's HQ in Oak Brook, Ill., was full of a "sense of malaise and dispirit." He writes, "people who were working on the brand did not really believe in the brand."

Yahoos know the feeling.

Larry writes that McDonalds got past this problem by marketing internally about the upward mobility available to employees of even the most humble, french fry-serving beginnings.

This advice rings true. Yahoo (like Google and other information worker shops) is defined by its people, and the company has taken a non-stop beating of ongoing layoffs even after ousting two Yahoos who claimed qualified to be CEO. I know someone who decided to stay at Yahoo — despite the bad news — in hopes of advancing in his career while others jumped ship: his plan was to get the new responsibilities, prove himself worthy of the company’s trust, and then decide whether his best options were inside or outside Yahoo.

Carlson’s other advice: fix the product (ala Harley), buy something sexy (as Gucci bought Yves Saint Laurent) and explain who a Yahoo user is (ala Apple’s “Think Different” campaign).

BTW, when Bartz was appointed six months ago, I encouraged her to reach out to employees and buy successful startups. Carlson’s advice today is more focused and better supported by evidence from business history.

Carol & Ed (but no Bob or Alice)

(Catching up on blogging)

The latest Yahoo cuts are troubling — Om Malik reports that Yahoo is now cutting heavily at Flickr, including its top development talent.

This reminds me of how CEO Ed Zander closed Motorola’s talent-laden software lab near UIUC two years ago. (Ironically, Yahoo created a new office to hire that talent.) Of course, we know how the Zander story ended.

Less than four months ago, I was very upbeat on Carol Bart. However, now she seems like she believes it’s possible for Yahoo to cut its way to greatest.

If she's not finding a way to effectively protect the company’s greatest asset — its people — then Carol will go down in history with Ed, if not Bob or Alice.

Best Yahoo news in years

Yahoo’s long search for a new CEO is over, and for once, I think they got it right. Yahoo today hired Carol Bartz, the chairman of the board (and former CEO) of Autodesk.

Bartz has real management skills and experience — unlike the Yahoo (or Google) founders. She knows something about a Silicon Valley company and managing technology development, unlike Terry Semel. In addition to competence and abilities, according to those who know her, she’s someone of unquestioned personal integrity.

There are two common criticisms of her. One is that it’s not clear how much she deserves for Autodesk’ success. It’s true, that it often hard (if not impossible) to separate the CEO from the hand that he/she has been dealt: achieving scucess as CEO of GM is undenaibly harder than being CEO of Toyota or Honda.

For every Steve Jobs or Lou Gerstner — CEOs who clearly turned a losing hand into a winning hand — there are plenty who were in the right place at the right time, and thus it’s hard to establish whether they added value or just avoided subtracting value. A good example might be Eric Schmidt, at least when he was CEO during the go-go Google years of 2001-2007. (We’ll see how he handles the next few years).

The second rap is that running a CAD software company doesn’t prepare Bartz for running Yahoo. Take this Wall Street Journal quote by stock analyst Martin Peers, whose only praise is that she’d sell the company in a heartbeat:

At first glance, Yahoo's choice of Carol Bartz isn't exactly inspiring.

The former Autodesk CEO is a capable Silicon Valley executive with solid management experience who should restore some order to Yahoo. That is crucial as the Internet company copes with what's shaping up to the worst recession in decades.

But there is a world of difference between the computer-aided design industry inhabited by Autodesk – Ms. Bartz's professional home for 14 years or so – and the ad-supported Web media business occupied by Yahoo.

This is a laughable criticism. Yahoo tried a media executive, that certainly didn’t work.

What was Schmidt’s qualification to be Google CEO? He was #2 man at an enterprise computer systems company, and then #1 man at a dying PC networking software company. That makes him more qualified than the CEO of a successful Bay Area software company? (We won’t talk about Lou Gerstner, a credit card salesman).

In addition to Autodesk, Bartz is also also a director of Cisco and Intel — a front row seat on the web. Yes, she hasn’t done been an Internet CEO before, but who has? Do you want to hire the head of Microsoft’s Live.com, which has been unable to take Microsoft’s billions of dollars and customers and catch Yahoo, let alone Google? Short of a Schmidt or Steve Jobs, is there another tech executive who’s got a stellar record of running a recent tech company (and is available)?

It’s tough to be CEO of a large established tech company: you have to find a way to balance control and process against decentralized initiative and innovation. Too much of the former, and you’re an HP or pre-Gerstner IBM; too much of the latter, and you’re Apple of the Jobs I and then Sculley eras (“What’s the difference between Apple and a Boy Scout troop? The scouts have adult supervision.”)

The truth is, she gets tech, she gets the tech culture, she understands how to manage an innovative software-based company — something Yahoo once was and hopes to be again. Her discussion of “fail-fast-forward” shows that she knows how to both encourage and manage innovation and risk-taking in a large established tech company.

She’s got the job, so what does she do next? I’ll assume she’s not just prettying things up to sell the company in 2009, but create value long term.

She’s not asking for my advice, but if she did, here is what would I recommend:

• In the long term, the success of Yahoo (like Google’s) is tied to leveraging economies of scope — continuing related diversification to build the Internet equivalent of a systems company, where the whole is greater than the sum of the parts. That will take 2-5 years to really show results.
• In the short term, Yahoo needs to size up the point products; that’s what’s suffered most (particularly in terms of business buyer confidence) from the recent turmoil. Of the various offerings, see which ones were/still are winners and what resources they need to succeed over the next 18 months. Until Yahoo has a new strategy, it needs to protect and strengthen winners Yahoo mail, Messenger and Flickr to keep marketshare and mindshare among its customers.
• Reach out — to employees, to customers, to the ecosystem of complementors, perhaps even to individual website authors who embed a Yahoo widget. Meet in person, post a video, send an email. The message should be “Yahoo has done great things and will do so again, but we need your ideas, suggestions, assistance — and patience.” Hire key aides in the office of the CEO to be a conduit and advocate for each of the major class of external stakeholders.
• Do a better job of monetizing search: if not the deal with Google or being acquired by Microsoft, how else can it raise its yield to approach Google’s?
• Find new areas to innovate (or buy successful startups). Yahoo lacks the revenues to go head to head with Google in search, but that doesn’t mean it can’t gain advantage over Google in mobile (where it once led), social networking, or other opportunities that are ripening right now.

I don’t know if she’ll succeed. Perhaps she has a personality quirk none of us know about. Perhaps her middle managers hide the truth until too late. Perhaps the company can’t be saved. But if anyone can make it work, I believe Carol Bartz can.

Four dying SV companies

On Sunday, Chris O’Brien of the Merc wrote about four dying Silicon Valley icons. For some reason, it wasn’t posted to the website Sunday or Monday, but it’s there now. He aptly summarizes the problems of three of these companies, and I recommend anyone interested in innovation (or the Valley) to read the analysis.

In my reading, two of the companies are (effectively) single-product companies where their product is no longer compelling and increasingly no longer competitive. AMD once was threatening Intel on the performance front, and now they are asset stripping in hopes of raising enough cash to stay alive. Palm created the pen-based PDA and for a while was a leader in smartphones, but their Treo remakes have long since run out of steam and their last Hail Mary wasted precious time and money.

The other two companies are diversified systems companies which were built around the idea of integration and economies of scope. Their stories diverge somewhat, in that Sun Microsystems was the dominant firm in a category that’s been dying since the end of the dot-com era, while Yahoo is #2 in a category that’s still very much alive.

Still, there are important parallels. Sun has been cutting its way to greatness for years, and is still floundering in search of a strategy that will somehow make up for its loss of a raison d’être in a world of commodity Linux boxes. (Thank you, Intel).

Yahoo has only recent begun to emulate Sun by cutting its way to greatness — with cuts of 7% in February (announced in January) and 10% earlier this month announced back in October. Even their cutting is not being done well: pre-announcing them makes it like a water torture, and they are also cutting staff from its winners and not just deadweight.

However, Yahoo has been floundering for as long as Sun — ever since it hired Terry Semel back in 2001. Semel was cast off in 2007, but his successor hasn’t done any better.

O’Brien puts Yahoo in a separate category, because he thinks they will do a deal in Microsoft in 2009 that will pull them out of a tailspin. But I think Yahoo’s problems are systemic, and even if they make nice with Microsoft, that won’t substitute for a lack of a winning strategy.

So will Yahoo die in 2009? No, but neither will Sun: it has enough inertia (through enterprise sales contracts) to keep limping along for another decade or more, as did DEC and Unisys and Cray and SGI and all the other computer systems also-rans.

Still, if Yahoo doesn’t get a better CEO and better strategy, all its point successes (like Flickr and mobile) will be for naught.

Biggest Yahoo of them all?

This week, Carl Icahn doubled down on Yahoo, adding 6.8 million shares (at $9.88 per share) to go with the 69 million he bought earlier at $25/share. Some see this as a positive sign, but increasing his stake by 10% (and net investment by 4%) seems a very weak endorsement of the company‘s future. Others speculate that he wants to influence the choice of top Yahoo to replace soon-to-be-former CEO Jerry Yang the man who turned down Microsoft’s $31/share offer.

Earlier this week, Merc columnist Mike Cassidy wondered whether Yang’s blunder counted as the “worst business decision ever.” I might have voted for worst decision of the year, but ever?

Cassidy got an earful from his readers, who suggested a range of other mistakes:

• Big Three automakers: for killing the EV1, making gas guzzlers “nobody wanted to buy”, and taking their private jets to beg for a bailout. Comment: Not even close.
• Xerox PARC for fumbling the future. Comment: Top 25 but not top 5.
• WebVan and the other dot-com fools. Comment: I was tempted to list these in the top 5, but then many of the founders dumped their soon-to-be-worthless shares on greater fools and now live in Atherton or Saratoga — so who made the mistake here?

I’ve got some other nominees. How about all those banks loading up on subprime loans? The decision of GM and Ford a decade ago to plough their cash back into their declining businesses, rather than buy out their (ultimately more profitable) competitors? Railroads passing up the chance to buy airlines 90 years ago?

One guaranteed top 5 pick: IBM handing control of the PC industry over to Intel and Microsoft in 1980 (a bigger mistake by at least an order of magnitude than Yang’s). Another (as recounted by Al Chandler): RCA aggressively licensing its color TV patents to obscure, struggling overseas electronics makers; the bottom line was nicely padded by royalty income, until Sony, Panasonic, Toshiba and others drove RCA out of business.

It’s hard to see how a Yahoo acquisition that never happened could touch some of the biggest value-destroying acquisitions of all time. Cassidy’s readers mentioned Time Warner buying AOL; as with WebVan, it was dumb for the buyer but not for the seller. While this probably destroyed the most market cap, in terms of consequences I’d put Sprint buying Nextel ahead of Time Warner’s mistake: Time Warner may survive but it’s not clear that Sprint will. (And while we’re on cellular, various firms like PacTel and MCI unloading cellular franchises in the 1980s would also have to qualify as top 25 blunders). Then there’s MCI buying WorldCom, certainly a purchase that had irreversible consequences.

There’s plenty of material here for teaching undergrads and MBAs. But even if every business student learn these lessons, foolish optimism or unbounded greed will cause some to make ever-greater mistakes down the road.

What Yahoo wants to be CEO?

The Chief Yahoo will no longer be Chief Executive. As announced in a memo to Yahoo employees and a public press release, Jerry Yang is stepping down as Yahoo CEO. Tomorrow’s WSJ article has the subhead “Co-Founder's Rebuff of Microsoft Haunted Tenure.”

Despite my criticism of Yang’s tenure, it’s not an easy job. Terry Semel didn’t do any better. But in 10 years, Yang will still be the Yahoo cofounder while Semel’s tenure will be a brief footnote in history. (Instead, Semel will be remembered for taking $25 million of shareholder money to endow a UCLA medical lab — or perhaps his wildchild who seems intent on proving Britney Spears normal.)

So who are they going to get to run it now? Eric Schmidt looks brilliant because he became Google CEO rather than stick around to be Sun CEO (another no-win hand.) Would Yahoo have done any better under Schmidt, without the Google money, market position, technology, and cofounders?

If the goal is just to stall until Microsoft buys them, that’s a plausible plan. Would they get even half of the $33/share they turned down six months ago? Seems pretty unlikely. So there’s $15b in Microsoft’s money that stays in Redmond rather than bailing out long-suffering YHOO shareholders.

Should Apple buy Yahoo?

PC World columnist JR Raphael notes the various rumors that Apple is getting into the search engine business. After noting that the world doesn’t need another search engine, he suggests:

3. If you must get into search, buy Yahoo. Please.

Speaking of [Jerry] Yang, there's a floundering search engine with a well-known brand just waiting to be bought. If Apple really wants to get into search, maybe it should consider snatching up Yahoo for the $4.99 price tag it likely holds at this point. Sure, Yahoo isn't exactly prime real estate at the moment -- but it has the potential to be, if people who knew what they were doing were running it. And while the word "success" hasn't been uttered for years at the Yahoo headquarters, the site does still have a sizable amount of users. Plus, if Apple were to buy it, we could finally stop having to hear all the silly announcements and proclamations about "the great new service" or "fantastic deal" Yahoo has in the works -- you know, the one that's really going to turn things around this time.

Apple isn’t going to buy anything as big as Yahoo, let alone acquire a sinking ship.

In 1997, a troubled Apple did sign a deal with big bad (rich) Microsoft to cooperate on software applications and accept a $150 million equity investment.

So it’s plausible that Apple might do a search deal with Yahoo: Steve Jobs could strike a hard bargain on the revenue share — a better deal than it would get with Google, since (other than iPhone on-deck real estate) Apple’s too small to have much bargaining power with the Monster of Mountain View. Apple also has the resources to bring some technology to the deal — just enough so that the iPhone search experience (or Mac?) will be different from what Yahoo! Mobile provides to other phones.

What were those Yahoos thinking?

Yahoo is cutting employees again. It’s hard to see how another 10% is going to cut “fat” without also cutting meat (i.e. the company’s ability to perform against its more affluent rivals).

I liked the AP report (published, natch, on the Yahoo website) on today‘s dead cat bounce in the stock price:

Yahoo's determination to rein in its expenses seemed to please investors, who have been disillusioned with the company's direction for years.

Yahoo shares gained nearly 7.6 percent in extended trading after ending the regular session at $12.07, down 79 cents.

The depressed stock price is particularly galling to Yahoo stockholders, given that Yahoo had a chance to sell to Microsoft for $33 per share in May.

But Microsoft withdrew its offer after Yahoo Chief Executive Jerry Yang balked at the price, arguing his turnaround plan would yield even bigger returns.

Yang's rebuff is now looking like a horrible mistake as online advertisers curtail their spending in anticipation of the worst recession in a quarter century.

As was clear at the time, Yang didn’t say “no” because he had a better turnaround plan or could create better value for shareholders. Instead, he didn’t want to be acquired — or at least he didn’t want to be acquired by Microsoft, the only bidder. This time, Carl Icahn rolled over rather than fighting to fix the problem.

So my riff on lack of accountability certainly would certainly extend to self-serving, value-destroying CEOs of publicly traded companies. Yang is neither the first nor the last.

Publicity Yahoo doesn’t need

By now, everyone knows that Governor Sarah Palin uses Yahoo for her e-mail, thanks to the anonymous group (named “Anonymous”) that broke into her e-mail account and shared it with the world. While Federal agents are investigating the invasion of privacy, and pundits filter the revelations through their pre-existing opinions (either for or against), to me it was remarkable how banal the revelations were.

But from a business standpoint, what seemed important was the reaction by security experts that of course no enterprise should use free webmail services for official business. As someone who used to plan security policies for his (small) firm’s IT infrastructure, my initial reaction was that this was just snobbery on the behalf of these “experts” to sell their expertise. (And, of course, the obligatory slew of press releases by firms seeking to capitalize on the revelation).

Since remotely-accessible e-mail systems are only as good as their passwords, the one key issue for any service is how facistic the password security algorithm is. If the guv used “ToddTrig” as her password then anyone could have guessed it with a hacking attack — whether the mail was hosted by yahoo.com or state.ak.us. If it requires a number and a letter and rejects things that are too easy, that would be better. However — as any CS-educated user will tell you — if they require changing the password every 6 months, all that means is that people will write down their passwords (a no-no) and it would provide no security at all against this attack.

(Many organizations require a VPN for remote access to any corporate information, which used to seem like overkill but today does not. However, requiring a VPN means that people will say “use my personal e-mail account” when business associates want to contact them on vacation).

The one line of argument that did seem persuasive is the area of password recovery:

Password recovery procedures are an area where the balance between security and usability is so blurred that most times the security aspect is non-existent, despite appearances. The leading theories about how the breach to Sarah Palin's account came about were that it was through the password recovery options associated with the Yahoo webmail interface.

Even if a user has selected non-standard secret questions, or has linked other email accounts, this sort of information isn't going to take a determined hacker very long to dig up, especially if the target is already someone in the public eye.

Having recently had to reset the password for one of my online banking services, it is quite clear that some firms do a much more serious job than others at coming up with password reset systems. My bank required a series of questions — and doesn’t use the same questions all the time, so someone sitting behind my shoulder might not know what to do last time. They also show me a secret picture to discourage “man in the middle” type attacks.

I just tested the password retest mechanisms at Yahoo and Google, and (today) both seemed better than most. Both use a captcha to prevent automated attacks. Yahoo gave me my custom challenge question, one where I won’t forget the answer but it’s so obscure no one will know the answer (although they could mechanically try to guess it). After L’Affair Palin, perhaps I’ll pick a different obscure question with an even more obscure answer.

Google refused to let me reset it online, but instead forced me to use my secondary email address. If I don’t have access to it, then I have to wait:

If you don't have a secondary email address, or if you no longer have access to that account, please try the 'Forgot your password?' link again after five days. At that point, you'll be able to reset your password by answering the security question you provided when you created your account.

To prevent someone from trying to break into an account you're actively using, the security question is only used for account recovery after an account has been idle for five days. The Gmail team cannot waive the five day requirement or access your password under any circumstances.

If you're unable to answer your security question or access your secondary email account, we regret that the Gmail team cannot provide further assistance. If you're concerned about the security of your account, please visit our Security Center.

Certainly this delayed gratification approach seems like it would prevent hacking of an actively used account.

Even so, this is the sort publicity that Yahoo (and Google and Hotmail) don’t really need, particularly when large bureaucratic IT departments start to ban the use of webmail accounts. Even famous people without IT departments will (not unreasonably) think twice about using such services for their mail.

Update Thursday 2:30pm. The Associated Press reports (on the Yahoo News site) that the hacker claimed to have guessed the answer to easy password challenge questions to get onto Palin's account:

The hacker guessed that Alaska's governor had met her husband in high school, and knew Palin's date of birth and home Zip code. Using those details, the hacker tricked Yahoo Inc.'s service into assigning a new password, "popcorn," for Palin's e-mail account, according to a chronology of the crime published on the Web site where the hacking was first revealed. …

Palin's hacker was challenged to guess where Alaska's governor met her husband, Todd. Palin herself recounted in her speech at the Republican National Convention that the pair began dating two decades ago in high school in Wasilla, a town near Anchorage.

"I found out later though (sic) more research that they met at high school, so I did variations of that, high, high school, eventually hit on 'Wasilla high'," the person wrote.

This is clearly an argument for individuals to choose their own challenge questions, and make sure the answers are obscure enough to protect against identity fraud.

Jerry needs to sharpen his resume

The local papers and websites have been full of coverage of how mad Yahoo shareholders are at being told that $33 is not enough for a stock now trading at $25. AP has a Microsoft leak showing that the last-minute raise to $33 was a credible offer. Now there is talk of a fight for the board of directors, not by Microsoft but by shareholders.

The blog site ValleyWag has wall-to-wall coverage, but my favorite posting came from a reader comment by “pleinad”:

You know what? I am hearing the 3 envelope story...a fictitious story of course...yet again:

Jerry had just been hired as the new CEO of a large corporation. The CEO who was stepping down (Terry) met with him privately and presented him with three numbered envelopes. "Open one of these if you run up against a problem you don't think you can solve," he said. Well, things went along pretty smoothly at the beginning, but later, stock price were down and he was really catching a lot of heat.

About at his wits end, he remembered the envelopes. He went to his drawer and took out the first envelope. The message read, "Blame your predecessor." The new CEO called a press conference and tactfully laid the blame, forcing a bunch of former execs to quit and gave a 100 day plan. Satisfied with his comments, the press and Wall Street responded positively, things began to pick up and the was soon behind him.

100 days later, the company was again experiencing a dip in growth expectation, combined with perceived strategy issues. Having learned from his previous experience, the CEO quickly opened the second envelope. The message read, "Reorganize." This he did, and the stock price rebounded.

After several more months, the company once again got into trouble with shareholder issues with his performance. The CEO went to his office, closed the door and opened the third envelope. The message said, "Prepare three envelopes."

Yahoo!

Yahoo shareholders enjoyed a wild ride today, albeit not as terrifying as it might have been. After bidding good riddance to Microsoft’s withdrawn buyout offer, Yahoo’s stock collapsed today, opening today near $23 (more than $4 lower than where it closed Friday) before recovering slightly below $25, down 15%. That the stock finished as high as it did is attributed to the belief that Microsoft will eventually make another offer. However, this being the USA, contingent fee lawyers are already preparing lawsuits against Yahoo management for refusing the offer.

For someone who played so much poker at Harvard, Steve Ballmer comes across as a terrible strategist — threatening to lower the price before raising it. No wonder employees, shareholders, Yahoo and analysts couldn’t figure out what he was up to.

Among all the coverage I saw today, I liked best the six minute video interview with analyst Henry Blodget — who (with good humor) noted that Ballmer cannot be simultaneously criticized for bidding too much at $31 and then for being too cheap to raise the price. Ironically, I found it on Yahoo Finance.

Blodget encouraged Microsoft to focus on its core business of operating systems and applications, not obsessing over its search rivalry with Google: “That’s what Steve should be focusing on, not trying to win a game he’s already lost.”

Never mind

After saying for 3 months that it wanted to buy Yahoo, on Saturday night the owner of Live.com said (to quote Emily Litella) “Never mind.”

Why did Microsoft throw in the towel on Yahoo? To summarize utterly conventional wisdom, I came up with 3 possible explanations:

First, Microsoft realizes a hostile takeover isn’t feasible, so Yahoo’s stalling will be rewarded with its continuing independence.

Second possibility is the price (as Steve Ballmer said today). MS originally offered $31 a share, today raised it to $33, but Yahoo was holding out for $37.

Third, Microsoft knows that pulling its offer will yank the support under Yahoo’s shares. The stock closed Friday at $28.67, but will open Monday below $25 and may fall next week as low as $20.

Current owners already wanted Yahoo to take the deal, but the collapse of Yahoo’s shares will certainly cause shareholders to light a fire under management. If management can’t get the shares above $30, shareholders with force management to sell the company — even if it is to Microsoft.

Aiding your enemies in total world domination

For the past three days I’ve wanted to blog on the most incredible article from the front page of Sunday’s Murky News. Reporters Elise Ackerman and Pete Carey documented how Yahoo worked from 2000-2005 to help Google get established and get revenues.

Here is an excerpt:

In 2000, Yahoo agreed to use and promote Google, which it touted as "the best search engine on the Internet." Google co-founder Larry Page described the pact as a "major milestone."

The following year, Yahoo was even more generous, paying Google $7.2 million for its services. (Google in turn paid Yahoo $1.1 million for promotional help.) Google desperately needed the money, which helped pushed it into the black for the entire year. ...

The paranoid survive

The tech industry's giants - like Microsoft, Intel and Oracle - are famous for ruthlessly dealing with competitors. Not Yahoo.

In 2002, Yahoo paid Google $13.2 million, equivalent to more than a quarter of Yahoo's annual profit of $43 million. The sum, however, meant less to Google, which had blown past its benefactor with an annual profit of about $100 million.

There is also an interesting sidebar about how Yahoo once owned 8.2 million shares of Google, and Yahoo founder David Filo owned an (unspecified) personal stake in Google. The article implies that the former stake was sold for about $1.4 billion from 2004-2005.

The two have obvious commonalties. Yahoo was founded in 1994 and Google was founded in 1998 — both by Stanford Ph.D. students. The two are 5.5 miles apart (“about 9 mins”) via the Bayshore, but only 3 miles as the crow flies.

The story is how the two firms were originally complementary but eventually became direct competitors. Yahoo CEO Terry Semel considered buying Google in 2002 but gave up, and so instead bought (loser) Inktomi. There are interesting tidbits, including early warnings by lower level managers to Yahoo execs that it wasn’t such a good idea to help Google in its march to total world domination.

As with all of MercuryNews.com, there’s no figures and no tables. The online article leaves out an interesting history of Yahoo, and some comparisons of Google and Yahoo revenues (plotted below in Excel) and search market share. We tend to forget that Yahoo was bigger than Google until 2005 — the current train wreck has been relatively recent.

My coworker Randy Stross is finishing a book called Planet Google, and in an e-mail this morning said he’s already covered it in the manuscript. He's doing final edits now and the book is due in September.

We both think that Yahoo’s helping Google is an exact parallel to IBM handing Microsoft the PC operating system franchise back in 1980. However, to my mind, IBM’s complacency as a 90-year-old Fortune 100 company vs. tiny Microsoft is much more excusable than Yahoo (at age 6) assuming it could forever stay ahead of Google (age 2).