Under New Leadership, Will Yahoo Find Its Way?

When Scott Thompson was named Yahoo’s new CEO effective January 9, he became the fourth leader in five years to be given the task of defining the ailing Internet giant.

Experts at Wharton say that Thompson, who was previously president of eBay’s PayPal unit, might be Yahoo’s last hope for becoming relevant again as a player in online display advertising, a market which the media company once dominated. Private equity firms and others — such as Chinese e-commerce giant Alibaba.com — had recently been showing an interest in buying Yahoo, which had been evaluating a number of strategic options. With Thompson’s appointment, “we’re likely looking at the last version of an independent Yahoo,” says David Hsu, a management professor at Wharton.

Thompson’s main challenge is the same as his predecessors’: Focus and define Yahoo’s business model. Although Yahoo is still ranked by research firm comScore as a top-five web property in terms of visitor numbers, it has struggled with its identity for years. The company’s mission when it was co-founded by Stanford students Jerry Yang and David Filo in 1994 was to index the web and give users access to the best sites. In many respects, Yahoo was the original Google, but without the algorithms. Lists of favorite links became categories and then subcategories. After Yahoo had overtaxed Stanford’s servers, the company sought out and received venture capital. A high-flying web directory and search player in the late 1990s, the company then morphed into a “portal” that could provide information as well as help users find it.

In 2000, Yahoo decided search was no longer a differentiating feature and decided to incorporate Google’s technology. After giving Google a big push, the company then decided to get back into the search game, realizing that marketing dollars flowed to key search terms more than they did to display ads. In 2004, the company resumed using its own search technology. In 2009, however, it did another about face and teamed up with Microsoft for its search results. In recent quarters, Yahoo has said that revenue per search — a metric used to measure search advertising effectiveness — has not been strong. Now, it finds itself competing with Google for search and advertising as well as web mail, photo sharing and a number of other services. It is also struggling to hold its own against social networking sites, like Facebook, which have become the web’s meeting spots.

Along the way, the company’s leadership experienced frequent turnover. In 2007, CEO Terry Semel was replaced by Yahoo co-founder Yang, who famously turned down a $44.6 billion purchase offer from Microsoft. (Yahoo’s market capitalization as of January 13 was about $19 billion.) In 2009, Yang gave way to Carol Bartz, who was hired based on successful runs at Sun Microsystems and software maker Autodesk. Bartz was replaced two years later by company CFO Tim Morse, who stepped in as interim CEO, holding that position until Thompson’s appointment. Most recently, Yang announced that he was cutting all ties to Yahoo by resigning from the company’s board of directors.

Enter Thompson, who took over as CEO on January 9. Thompson is known for his technological acumen, and his task is to put Yahoo on the leading edge again. “Thompson is trying to rejuvenate a company in a tough situation. Yahoo has lacked focus for years, while Google and Facebook have been more focused,” notes Wharton management professor Lawrence G. Hrebiniak. “Yahoo seems to me like it’s a second-in, me-too company. It is outclassed.”

On a January 4 conference call, Thompson noted that Yahoo has a lot of potential, including 700 million unique users a month. His goal, he added, is to “return this business to being one of those great iconic brands … [as] a real leader at the forefront of innovation that’s happening online.” Like Bartz before him, Thompson said he intended to leverage Yahoo’s vast amount of customer data to deliver new and unique experiences. “We will be back to innovation, we’ll be back to disruptive concepts, and you’ll see, over time, a series of really great next-generation products coming from this business. And if we do it right … that will become the identity of the business yet again.”

A Puzzling Appointment

The move to hire Thompson as CEO drew a mixed reaction from analysts — mainly because of Thompson’s background in technology instead of media or corporate turnarounds. Prior to his role as president at PayPal, Thompson was chief technology officer for the company and held technology leadership positions at a Visa subsidiary and Barclays Global Investors. “Thompson is an impressive manager who proved at PayPal that he can successfully run a fast growing company,” Youssef Squali, an analyst at global investment banking firm Jefferies, wrote in a research note. “That said, he’s a technologist. His appointment is somewhat puzzling to us given Yahoo’s effort in the last few years to become more of a ‘media and content’ than a ‘pure technology’ company.”

Peter Fader, a Wharton marketing professor and co-director of The Wharton Customer Analytics Initiative, agrees that the jury is decidedly out on Thompson because of questions over his lack of experience in media and content. “It’s not clear if Thompson is the right guy.” Still, he agrees with Thompson’s statements on the January 4 conference call about placing a new emphasis on leveraging customer data as well as balancing the needs of consumers and advertisers. “Those items are really just the start of a conversation,” he adds.

Kendall Whitehouse, director of new media at Wharton, notes that Thompson’s technology background could turn out to be pivotal. Although Yahoo is a media company, “technology is the differentiator” in terms of delivering content and matching it with relevant advertising, he says. Others agree that Thompson’s background in technology could be a boon to the floundering media firm. “I think [Thompson's appointment is] a good decision, because what Yahoo needs right now is to return to its technology roots and become innovative again,” says Kartik Hosanagar, an operations and information management professor at Wharton. “The move will also help retain and attract technologists at the company.”

On Wall Street, some analysts have also argued that an emphasis on technology could breathe new life into Yahoo. “We welcome [Thompson's] focus on the importance of technology, marking a shift in tone from previous management,” wrote Deutsche Bank analyst Jeetil Patel in a research note. “Innovation and product quality have been a shortcoming at Yahoo for years.”

The ‘Anti-Bartz’

Today, Yahoo is largely valued on stakes it has in China’s Alibaba.com and other assets. Hrebiniak points out that Yahoo could sell those assets and reap billions of dollars, while still lacking the culture and focus to effectively compete with the likes of Google and Facebook. “What is the culture of Yahoo?” he asks, pointing out that the company has suffered through a revolving door of high-level executives and that lack of continuity has hurt the company in its search for a viable strategy.

In fact, many of Yahoo’s present challenges are similar to what Bartz faced when she came on board in 2009. “If you look back at earlier articles on Yahoo when Carol Bartz took over, the commentary was nearly identical,” says Whitehouse. “Yahoo still has the same two significant problems it had then: Figuring out what businesses it is in and executing. There has been a long period with a lack of clarity.” Whitehouse adds that many of the comments from Thompson during his conference call were also uttered by Bartz during her tenure.

Whitehouse suspects that under Thompson, Yahoo can stabilize, but “it’s a different challenge to be a high-growth company. Figuring out where Yahoo can grow is going to be tough.” Hsu points out that Yahoo does have a few factors working in its favor, including its huge user base — one of the largest audiences on the web — and its brand value. It also benefits from inertia as customers keep their email accounts out of habit. The problem, he notes, is that Yahoo has lacked vision.

According to Hosanagar, Thompson will need to overcome that hurdle by being the “anti-Bartz.” While Bartz “was aggressive early on with restructuring and downsizing, she never successfully positioned herself as an innovative CEO who is seeking to bring new products and services to consumers.” He notes that Yahoo reported more than $6 billion in revenues and exceeded $1 billion in profits last year. “The company is not going anywhere. The major issue is that its growth is lagging the industry…. Yahoo needs to come out with a new, compelling product that is not an effort to catch up with Google or Facebook or anyone else, but instead is revolutionary.”

A Tale of Two Portals

It remains to be seen whether Yahoo can make some big bets, but Thompson indicated during his call that customer data could help to differentiate the company. As part of its content strategy, Yahoo serves up custom pages based on user preferences. “Data is a very hard concept to understand unless you’re in the middle of it, and we will be in the middle of it. There’s tremendous value if you can organize and interrogate data at the scale Yahoo has,” said Thompson.

According to Fader, data could be a strong resource for Yahoo, but it’s unclear whether the company has the skill to effectively use it. Ultimately, if Yahoo can find the right balance between the needs of advertisers and consumers, it can compete against other companies, including another high-flying Internet company that has fallen on hard times — AOL. According to Fader, AOL and Yahoo are natural comparisons because they both “are portals trying to find their way.”

The big difference between AOL and Yahoo is that the former has accepted that it is largely an ad network, Fader notes. AOL has acquired brands like TechCrunch and Huffington Post to target specific demographics, and its Patch network is designed to court local advertisers. By comparison, Yahoo has remained broad in its media strategy, delivering basic news, sports and finance information. “AOL has spent much more time developing unique ad structures,” Fader points out. “Yahoo hasn’t fully embraced that. It has been trying to be an information provider, when it’s more about what ad to serve the customer at the right time.”

As a result, Yahoo has seen its position in online advertising slip recently. According to The New York Times, Facebook surpassed Yahoo in display advertising sales last year. And while the total market for online advertising grew by 20% in 2011, Yahoo saw its own portion of that pie decrease from 13.3% in 2010 to 11% — a factor that helped fuel Bartz’s departure.

Fader predicts that Yahoo is likely to find its ad-consumer balance through trial and error and ongoing experimentation. Few companies can effectively match content with advertising, he notes. Fortunately for Yahoo, Thompson already seems to be thinking about balancing the needs of users and advertisers. “One of the great things we were able to achieve at PayPal was balancing the consumer needs, the consumer experience with the merchant needs and the merchant experience,” said Thompson. “I feel very strongly that [this] balancing is what we need to have here at Yahoo, between the consumers … the content and the advertisers.”

What’s uncertain is how much time Thompson has. Experts at Wharton note that investors are becoming increasingly impatient with Yahoo — and users will likely follow suit. “Yahoo’s eyeballs are big assets, but you can’t count on them staying around forever,” Fader says.

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