Analysis: What's Next for Yahoo?

It was perhaps no surprise that beleaguered Yahoo! Inc.'s Terry Semel finally vacated his chief executive's seat this week. The former movie-studio honcho had been under fire for his generous compensation—stock options boosted his 2006 compensation package to $71.7 million—even as Yahoo lost ground to rival search portal Google Inc. in both the search business and the online advertising market.

The surprise came in the hours that followed, with rumors that Rupert Murdoch's News Corp. had broached the idea of merging its MySpace social-networking unit into Yahoo. News Corp. bought My Space in 2005 for $580 million; news reports say the company wants a 25 percent stake in Yahoo in exchange for My Space—a deal that would be valued at some $10 billion. Neither company has yet confirmed the reports, most prominently in The Times of London on Wednesday. True or not, all eyes will be on Yahoo, whose stock has dropped nearly 30 percent since the end of 2005, as its cofounder Jerry Yang steps into chief executive role and CFO Sue Decker, once Semel's heir apparent, becomes company president.

To make sense of the shake-up and the speculation, NEWSWEEK's Brian Braiker spoke with Allen Weiner, a media analyst and vice president at research firm Gartner Inc. Excerpts:

NEWSWEEK: Neither company has confirmed the rumors yet, but MySpace and Yahoo? Would that deal make sense?
Allen Weiner:
The big weakness at the three search portal companies—Microsoft, Yahoo and Google—is that they lack the platform that brings it all together. There are some that argue that MySpace is a portal. What is the most powerful entry site for millions of individuals? It's MySpace. What is most relevant to the emerging young digital consumer is everything they can get through MySpace: you can get music, you can get news, you can get TV. It's where the portals should have evolved. Microsoft's trying to build that with its Spaces project. Yahoo tried that with Yahoo 360, with disastrous results; it's not even a poor man's MySpace. Google has Blogger as a platform, which is pretty powerful, but they're more interested in searching and indexing and monetizing things, so maybe Google doesn't care.

But isn't MySpace's success attributable to the fact that it started as an organic social network, not under the auspices of some big corporation?
It is. But now it's to the point where it's seeking to mature in a number of ways. It's no longer the work of smart people; it's part of a major media company. The things that are missing from MySpace is some of the stuff Yahoo or Microsoft have—mail and messaging and some very powerful Web 2.0 tools like tagging and creating blogs. So it can become a pretty interesting synergy. Yahoo is in need of something, that's why it leads to all this speculation. The first big rumor a month and a half ago was that Microsoft was buying Yahoo. Then it was that Yahoo was buying Facebook. This signifies the fact that Yahoo, as it exists today, needs some gigantic shot in the arm to move forward.

Wouldn't Facebook be a smarter buy? Facebook seems like it has more potential for growth ...
I would have said that probably up until the middle of May. I think Facebook is giving the marketplace the sign that it wants to be its own powerful platform. I think Facebook wants to be a combination of MySpace and Yahoo. Facebook started a whole new program, a marketplace, a third-party developer plan. If it had intended to work with Yahoo, it would have held off on those. I think Facebook views itself far more as competition to Yahoo. The News Corps thing is more interesting anyway because you've got an established media company involved; there's more media content here. But the thing that nobody ever talks about with some of these deals is: what would it take to integrate these two companies? The guys at MySpace have enormous challenges just keeping the site up and running. So, OK, you're going to merge. How long would it take to get those two things together? How long would it take, for example, to incorporate Yahoo instant messaging or mail into MySpace? There has to be some level of big integration.

This is all speculation right now. What's the likelihood that something like this may go through?
I give it a five on a scale of zero to 10. It is an obvious outgrowth of a new CEO. There are those that believe bringing Jerry Yang on is a signal to marketplace that the company is getting ready for a big acquisition or positioning itself to be acquired. I think it's the opposite. I think that Jerry wants to fix things internally before they do anything. When you have an engineer as CEO you can expect tech to be on track. I think they won't do anything dramatic until that period of time is over.

Yet it doesn't seem like Yahoo can afford to be cautious right now.
I don't think [Yang] will be cautious. There's this audit process that needs to happen. But he's going to have a better handle on his company's strengths and weakness. Go back to the legendary peanut butter manifesto, the memo that leaked out from former executive that they had spread themselves too thin like peanut butter. I think one of Jerry's initial goals, working with Sue Decker, is to prioritize.

What do we know about Yang's leadership style?
When people asked me who the best CEO is for Yahoo, I've been saying for years it's him. Jerry has a very singular ability for that company, the left brain-right brain capability. The successful technology companies have always had that. Steve Jobs understands the implications of technology as well as its business potential. Bill Gates is another. I think far too often we're seeing leadership in the technology companies that has one or the other.

And what do we know about the new roles for Decker and [Yahoo cofounder] David Filo?
I don't know what [Filo] does day to day any more. Sue Decker is powerful in day-to-day operation, and is that combination of a visionary and day-to-day operations person is exactly what they need. Jerry is an organic guy, and I think were looking at people whose heart and soul is of Yahoo.

What will Semel's legacy be? Yahoo stock tripled since he took over in May 2001, and yet there's the compensation scandal and Yahoo's rousting by Google.
I think that he's going to represent a period of time in which Yahoo believed it could become a media company. He's going to represent a misstep in direction. He was brought on board because he had a Hollywood background and he was going to make Yahoo the next big media company. What he misunderstood is that media companies aren't looking for a relationship where a Yahoo is going to be dominant. They want to be dominant. Yahoo started a television station in Santa Monica. That will be among the things in his legacy that didn't work.