The ‘Morse Code’ at Yahoo: Bet Big, or Die

Tim Morse, Yahoo’s new interim CEO, needs to sharpen his focus on two things to right his embattled company, according to Kevin Werbach, Wharton professor of legal studies and business ethics. The company must “become relevant again in the Internet market and have a viable, differentiated long-term business model,” says Werbach, who studies digital convergence and innovation, among other subjects. Morse, 42, stepped up from his previous role as chief financial officer on Tuesday after Yahoo’s chairman fired CEO Carol Bartz over the phone.

Bartz, 62, had little more than a year left on her contract since taking over as CEO in 2009. Sunnyvale, Calif.-based Yahoo had hired her on the strength of her successful runs at Sun Microsystems and software maker Autodesk. But a recent study of Yahoo’s assets and performance conducted by independent directors “concluded the company wasn’t performing as well as it could,” according to a Wall Street Journal report. Visitors spent 33% fewer minutes per month on Yahoo’s U.S. website since Bartz became CEO, the report said, citing comScore data.

“The company is still basically playing out the Internet portal model that it pioneered in the 1990s,” says Werbach. “Morse, or whoever takes over as the permanent CEO, needs to make a major strategic decision: Sell the company or bet big on a big idea. Just managing effectively on the current trajectory is a path toward a death spiral.” Yahoo has, over time, been courted by potential acquirers, but no deal has come close to completion.

Kartik Hosanagar, Wharton professor of operations and information management, doesn’t believe Yahoo is reaching its end. He points out that the company reported more than $6 billion in revenues and more than $1 billion in profits last year. Yet, the company “is not going anywhere,” he says. “The major issue is that [its] growth is lagging the industry, especially [that of] Google, Facebook, etc.”

Hosanagar suggests that Yahoo should go back to its roots in media products. “It 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. It should think about how to create that culture of innovation within and find that spark that resulted in Yahoo being formed in the first place.” Efforts to catch up or beat Google at search or email, or to compete with Facebook in social marketing, “will be misguided,” he notes.

One of Morse’s top challenges will be to decide whether or not to sell Yahoo’s 40% equity stake in Chinese e-commerce company Alibaba Group. Bartz had resisted Alibaba’s efforts to buy back that stake, for which Yahoo paid $1 billion six years ago. Investment analysts suggest that Morse should retain Yahoo’s Alibaba stake, especially because of the potential upside from a possible listing of Alibaba’s popular online shopping site, Taobao, according to a Bloomberg News report. Bartz courted controversy in May when Alibaba sold control of its online payment company to a group controlled by Alibaba’s CEO. “The Alibaba debacle made investors insecure about whether or not the crown jewel (Alibaba) will stay with Yahoo or not,” Hosanagar says.

Hosanagar notes that Bartz seemed focused on financial and organizational re-engineering. That “was fine to an extent … but she never successfully positioned herself as an innovative CEO who is seeking to bring new products and services to consumers.”

Bartz clearly didn’t have many friends on Wall Street. Yahoo’s shares rose more than 6% to $13.70 in after-hours trading on news of her exit. To be fair, the Journal story says Bartz got some credit inside the company for overhauling the organizational structure and challenging practices she thought were slowing things down. But she apparently made some wrong calls on the company’s U.S. ad sales campaign and in facing up to competition, the Journal adds.

Morse has sufficient momentum to build on, says Werbach, pointing to Yahoo’s “valuable assets, lots of users and some very talented people.” Yahoo needs to find a strong future strategy if it wants to remain an independent company, he adds. “The very few large tech companies that have successfully turned around [such as IBM and Apple] had long-term visions that played to their unique strengths.”

Some of that sounds familiar: Yahoo needs focus, according to Wharton experts who offered advice to Bartz in a January 2009 Knowledge@Wharton article. “Yahoo is this odd company that is part search, part technology and part media,” Kendall Whitehouse, Wharton’s director of new media, told K@W. The company “needs to pick one or two of those parts.”

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