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Five Steps to Get Yahoo Back on Track

The Internet giant's shakeup is a step in the right direction, but it still has a ways to go. We talked to those in the know to find out what Yahoo should do

Terry Semel, Yahoo!'s chief executive, certainly doesn't lack for advice on how to turn around the Internet portal. Whether he wants it or not, Semel has gotten an earful in recent months, from bloggers calling for his ouster and even from one of his own executives suggesting the company needs to fire 20% of its staff. At this point, he no doubt feels he doesn't need any more tips.

No such luck for Mr. Semel. Even as he announced plans on Dec. 5 to reorganize the company and revamp his executive team (see, 12/6/06, "Yahoo's Shakeup"), some investors, at least, wish he would do still more. Yahoo's stock fell 2%, to $26.86 a share, on Dec. 6 as they digested the news and didn't find it all that appetizing. That's on top of a 33% decline in its stock price so far this year.

Truth be told, nobody thinks a reorganization is a solution in itself so much as potential grease for people to solve Yahoo's challenges. And there are many challenges. Paramount among them is getting back in the search advertising game with Google (GOOG), whose more relevant search results by most accounts generate more than twice as much money per search ad as Yahoo's (YHOO).

Yahoo also has to find ways to make money from all those social services it has been buying and creating. Not least, it has to figure out how to recapture its lost buzz.

How to do all that? Sought or not, these are some of the suggestions that helpful people in the know are putting forward for Semel to chew on:

1. Simplify, Simplify, Simplify

Yes, that means on three fronts. For one, Yahoo's home page has become woefully cluttered with everything from long lists of services to Lending Tree ads jammed into a top corner. A redesign rolled out in May helped, but didn't go far enough. One former Yahoo design manager told BusinessWeek way back in 2005 that "you can't immediately tell why Yahoo is the best at anything." Another noted that the home page "suffers from too many cooks in the kitchen." That's in stark contrast to Google's ultra-simple front page, which has helped it become the search engine of choice at a time when search advertising is where it's at.

Yahoo's home page is a direct reflection of criticisms that the company tries to do too much—and that's why the company needs to simplify not just its look but the array of services themselves. "It needs to shed some businesses," suggests former search vice-president Ali Diab, now cofounder and co-president of ActiveMaps, a Los Angeles startup. He wonders whether Yahoo's getting a benefit from the likes of Yahoo Pets and Yahoo Health, and thinks they should be spiked, just as Google recently ended its Answers service.

To corral all those services into more coherent offerings, Yahoo needs to simplify its own organization, too. That's just what Semel aims to accomplish with his reorganization of the company into three groups. But it will take strong leadership in each group to dissolve the so-called matrix organization of overlapping responsibilities that many current and former Yahoos think has slowed decision-making. Right now, says a former Yahoo executive, "There's a huge overhead on each project, and nobody really owns each product."

2. Get New Blood, or At Least a Transfusion

Sue Decker, the chief financial officer who's taking over the new advertiser and publisher group, gets universal kudos for her openness and smarts, but it's unclear whether she has the operational expertise and advertising savvy that's needed.

Semel appears to recognize that Yahoo needs some outside perspective on its problems. He's searching for a new exec, probably from outside, to head the new audience group, responsible for Yahoo's many services. Good thing, since former Warner Brothers executive Semel hasn't been able to turn many of Yahoo's legion media properties into must-visit venues like News Corp.'s MySpace (NWS) or Google's YouTube.

"They want to bring in someone with a new perspective," says Ellen Siminoff, CEO of search marketing firm Efficient Frontier. This person's first job: Figure out what Yahoo really is—portal, digital life utility, Media 2.0, whatever—and focus everything on fulfilling that vision.

3. Set the Nerds Free

Creating a separate technology group, as Semel announced, is a start. Merrill Lynch (MER) analyst Justin Post, who has a buy on the stock, wrote in a report that "the elevated status of the Technology Group underscores management's commitment to improving product innovation." But that's not enough. Chief Technology Officer Farzad Nazem is a 10-year veteran who keeps the site running smoothly but is criticized by some former Yahoo techies for a top-down organization that discourages creativity.

Indeed, some of Yahoo's more important new technology, such as the Flickr photo-sharing site and the social Web bookmarking site, were acquisitions. Their success so far in injecting their social DNA into Yahoo is promising but incomplete. Giving techies even freer rein clearly has paid off big-time for Google. It's a good bet that plenty of tech folks have fire in their bellies and just want the chance to realize their dreams.

4. Get Panama Out

But don't stop there. Project Panama, intended to revamp Yahoo's advertising system to make it easier for advertisers and publishers to target ads, is months late and still won't be fully operational until at least early 2007. As Google keeps charging ahead, Yahoo can't afford any more delays as search continues to lead growth in online advertising. "At the end of the day, everything depends on Panama," says Siminoff. "Panama needs to work."

Even if it does help Yahoo approach Google, though, that won't be sufficient to return Yahoo to its former glory. Yahoo's key strength remains its dominance of display advertising on the Web, and it must find ways to offer advertisers a unique proposition that includes that edge. "It's really about taking search to the next level—merging brand advertising with search," says Charlene Li, an analyst with Forrester Research (FORR). "Google can't do that. Marketers want to be able to target people with different intents," not merely people who are typing in search terms.

5. Enough with the Manifestos

It's widely assumed that Senior Vice-President Brad Garlinghouse's scathing memo on what Yahoo needs to do, known as the Peanut Butter Manifesto, precipitated the shakeup (see, 11/19/06, "Is Yahoo! Spread Too Thin?"). Maybe, maybe not. But while many people inside and outside Yahoo think he spoke the truth, many others think the leaked memo was a destructive power play that offered few useful suggestions.

What might work better: the return to more public prominence of Yahoo co-founders Jerry Yang and David Filo. It's not as if they haven't been busy on strategy and product development behind the scenes. But as longtime software developer Dave Winer notes on his well-read blog, "What Yahoo may need is someone who can speak for them, who can give an exciting speech, who can lead all the external forces, and internal ones too. What they may be missing is an eloquent founder-type who, when people need to settle a difference, can come in and make the choice." If ever this company needed its chief yahoos to step up, it's now.

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