The Ins and Outs of Yahoo!

Shortly after it was announced that Yahoo CEO Carol Bartz was departing, the always funny Andy Borowitz tweeted:

“The CEO of Yahoo just resigned. I had never heard of her so I Googled her.”

What makes any great comic funny is the truth underlying a punchline.  I wonder if Andy knew just how close he got on this one, which was reported by the Los Angeles Times.  What Andy points to in far fewer words than I will use is precisely the problem of what went wrong at Yahoo.  Yahoo was one of the three great search engines still standing on the web as late as 2009, in fact it was #2 behind Google and ahead of Bing (a.k.a. Microsoft).  Search was in Yahoo’s DNA, it was a core competency, Yahoo was very good at Search and a tremendous amount of self-selected traffic still flowed through Yahoo Search (Microsoft noticed this, too).

Remember that Yahoo bought Overture in 2003, the pioneer of text-link keyword advertising, and honed paid search advertising as mainstream before Google took it to perfection.  Remember also that Yahoo helped put Google on the map when for a long period of time it outsourced Search to Google in exchange for “Powered By” credit and revenue sharing — a business development deal it later regretted because that little “Powered By” logo pretty much put the Google brand on the global map.  At the end of that deal in 2004, Yahoo took Search back and went on to be a respectable competitor to Google.  Sure its Panama search ad buying system upgrade was a little late to market, but it was also very good.

I have great misgivings about the notion of Monday morning quarterbacking any fellow CEO’s performance, since no one on the outside of any problem ever has enough detail or information to make a well-reasoned assessment of someone else’s decision-making. In the case of Yahoo, I offer this personal observation only for the lessons that I believe need to be evangelized.

Early in her tenure, Carol Bartz made a decision to outsource Search and the text ad auction platform to Microsoft. Her rationale seemed to make sense in the savings she would achieve, but that presumed there was no growth left in Search, which had become dominated by Google to the tune of 65% market share, the remaining share going to Yahoo and Bing.  We all know that Microsoft was spending heavily to gain share, up to and including offering to buy Yahoo for more than $44B.  This post is not about that decision, nor does it have anything to do with the circumstances or theatrics of Bartz’s departure.  It has to do with one and only one thing, my own opinion that the decision for Yahoo to exit Search was not a good decision.  Here is why:

In any company, you strike a balance between what you build and what you buy.  Every senior executive and management team struggles with this every day.  No company — not one of the Fortune 500 companies, not the one person startup in your garage — has all the resources to do everything it wants to do or needs to do.  Management must make tradeoffs, sometimes hourly.  Talent is not unlimited, access to capital is not unlimited, time is anything but unlimited.  Management has to decide what it will build and what it will buy.  Will a company hire talent, buy another company, or outsource a task?  These questions never go away, thus management always needs a framework for making these decisions without guesswork or emotion.  Here in a nutshell is that framework:

You in-source that which is strategic — that which is vital and essential and defining to a company’s success in the landscape of its peers.

You outsource that which is tactical — that which is non-essential to the company’s definition in its chosen competitive space

Let’ start with the basics: an intellectual property company — whether technology based, media based, or design based — is a creative company.  That means success begins with an assessment of one’s unique core competency, and that informs leadership through product strategy, not structural adjustment.  Applying unique core competency to product vision drives innovation, forcing a company to determine how it will always be as good as or better than its peer group or competitive circle.   Creative destruction — the continual reinvention of a product or service through ceaseless innovation — begins with the decision not to position one’s output as a commodity, where price rather than differentiation calls the shots.

When Steve Jobs returned to Apple in 1997, he applied a product vision to absolutely embrace the internet through leapfrog design, which was exactly the right move at the right time.  When Eisner and Wells took over management at Disney in 1984 when it was on the verge of a breakup, they applied a product vision to reinvent the company’s product lines through best in class storytelling, merchandising, and delivery mechanisms.  When Jack Welch took over General Electric in 1981 and decided he wanted to exit small appliances, he applied a product vision to become a market leader in industry leading medical equipment and aircraft engines.  In all three cases, it was product strategy — knowing what to keep, knowing what to dump, and knowing what to pioneer — that led to unparalleled success.  They did not outsource their winning moves, they owned them.

The turnaround at Yahoo after the refusal of the Microsoft buyout offer was positioned broadly as structural adjustment.  I am sure there were inefficiencies at Yahoo like there are in any big company, but if you solved all those and added no product vision, it really didn’t matter what you solved.  You would have a more efficient machine that produced less visionary work.  That is not a growth company with promise.  It is a factory.  A factory is not a creative company, it is a factory.

For any “portal” platform, Search is not tactical, it is strategic.  I have heard the argument against this for ten years and it just wrong.  How do I know that?  Look at Google.  Search is their core competency, it is their DNA.  So if Search is strategic for Google and you are competing against them, then how is it tactical?  You may choose to decide you can’t compete with them, which is fine, but if Yahoo was not competing with Google, then who was their competition?  Content companies with big editorial and production costs?  Ad networks?  Telecom?  The problem for the Yahoo employees has been that they were never sure, and the company’s valuation is a reflection of that ambiguity.

Imagine that instead of agreeing to the Microsoft partnership, Yahoo had fought with every fiber of its creativity and gained 3 or 4 points of market share from Google on product respect recognized by the public.  Imagine instead of the mass media branding campaign they did two years ago if they had put all of that money into engineering talent and led a battle cry inside the company to take Search share from Google by improving their algorithms, relevancy correlations, and keyword auction technology while mobile was still nascent.  Would the street have valued that commitment and its promise over the one time benefit of cost cutting and the ten-year forecast baked into their financials of the low delta Microsoft contribution?  Would the employees have given everything they had for the pride of winning, not to mention the potential payoff in their stock options?  Was the Search game so over in 2009, just 15 years into the commercial internet, that walking away from Search when you were still positioned as a top 3 player made sense?

And if you were going to exit Search, where was the company’s core creative focus to be redirected?  Long ago, Tandy got out of leather goods to become Radio Shack, a bold move for its time, but one with a rallying cry.  Yahoo got out of Search, so that people today ask, “What is Yahoo?”

Simple lessons replayed:

In-source that which is strategic, outsource that which is tactical. 

If you exit a strategic line of business, you better have a better one to champion as its replacement. 

A technology company is a creative company.

Creative people have a dire need to build that which is great.  That is what they do.  That is how innovation happens.  Creative destruction is how value creation in legendary companies is sustained.

Yahoo may or may not address this on the rebound, but all of us should take the opportunity to ditch the hyperbole and internalize the basics of identifying and sustaining core competencies that are lasting and cherished.  A brand is a promise.  That promise is delivered not by what you rent, but by what you own.

Fleeting Moments in iHistory

Why don’t internet brands make comebacks?

With the recent attention on onetime market leaders AOL, Yahoo, and MySpace to inject new creativity into their platforms, I have been talking with a number of people about why this isn’t just the notion of business as usual, with the expectation that success is much more probable than unlikely.  We are so quick in the internet age to exchange snarky remarks about last year’s fading nameplates, as if it were all but inevitable that a fallen giant cannot get up and march on.  Why?

Well, aside from our gossipy predisposition to critique, there is a good reason we take a skeptical point of view about internet brands that have seen better days — in almost all cases, those were their best days.  Major turnarounds don’t seem to be the norm, sadly, they just don’t seem to be out there much at all.  We can point to several works in progress where noble efforts are underway, but we can’t really write a business school case study on a revamp that is making history and ripe for the textbooks.

Although this is reality, it does not make sense, certainly not good business sense.

Most traditional brands go through life cycles: they are cool for a while, then something inevitably goes wrong — operational mishaps, disruptive entrants, or market forces — then visionary management attacks the problem and turnarounds do happen, sometimes monster turnarounds.  Think about what happened with the rise and fall and rise of Disney, the same but even more so at Apple, the customer win back at Coke after the public rejection of new-Coke, multiple cycles up and down at Sony, the same to a lesser extent at MTV.  All of these instances gave management — often new management — a starting point for the very real consideration of turnaround plans.  Management carries out the traditional a SWOT (Strengths-Weaknesses-Opportunities-Threats) analysis, and the discussion centers around how probable the turnaround plan under consideration might be, not a passive discussion of should we bother.  You always bother.

Look at what just happened at the Wall Street Journal, newspapers have been pronounced on their way to the graveyard, but the brand has never been stronger and circulation is growing on multiple platforms.  That is giving the New York Times hope, the Los Angeles Times as well.  You always try because the asset you have is simply too valuable not to try.  CBS, NBC, ABC, HBO, they all have good and bad seasons, but you don’t think about walking away after a bad season.  Look at MSNBC, how it struggled out of the gate, now it has an identity.  Sticking with an established beachhead can work, surely not all the time, but there are so many examples where the uphill effort is proven to be worth it.

Like internet brands that have enjoyed success, non-internet brands once in the limelight come to the outset of a turnaround with some remaining loyalty, mass reach, measurable unaided awareness, and some core value proposition.  The fact that tastes have changed or tactics have failed doesn’t mean you have lost everything, you just have a lot less of it.  You have something to work with, so you don’t walk away, your investors would not be pleased with those kinds of write downs.

Let’s think about the dotcom bubble and all the brands it birthed, starting with the portal wars — Excite (then Excite @Home), Lycos, Looksmart, Infoseek (then Go.com) — they all had huge followings, now they are answers to trivia questions.  What about Friendster, eToys, Netscape, NeoPets, Encarta, GeoCities, Pets.com, Webvan?  These were all massively attended internet destinations, great names with tremendous followings built on innovation and creativity.  Was there really nothing better to do with their identities than turn away?

I started to wonder whether our relationship with brands today is somehow different from our relationship two, three, four decades ago.  Were we somehow more willing to give brands a second chance then that we are not now?  Is this generation of consumers somehow wired differently, have we come to a new understanding of inertia so that once cold something must stay cold?  That would have been an easy answer, but one trip to the Apple Store will change your mind quickly.  Spend a little time in the store with the other customers and you will soon be reassured just how much a once loved, then dismissed, then reinvented brand can be loved anew.  Ask tweens about Disney Channel, which they never would have been caught dead watching a generation ago, but now it too has been reinvented to become a trendsetter.

No, brand laws may evolve, but they haven’t died.

What seems most ironic to me is that when you look at the giants of brand reinvention, the core turnaround strategy is not financial engineering, but rediscovery of the company’s roots in innovation.  Disney expanded its theme parks, its own hotels, rebuilt its animation efforts, created the DisneyStores, and rode a wave of home video before acquiring ABC and later Pixar and Marvel.  Apple upon the return of Steve Jobs pioneered the iMac, then iTunes, then the iPod, then the iPhone, then the iPad, all the while building out the Apple Stores.  Microsoft from a standing start entered the entertainment world with Xbox, as Sony had done prior to that with PlayStation.  Clearly these involved massive investments, but they were bets on products and services, new ideas from talent and passion within the company.

Can we imagine a day when Google, Amazon, eBay, or Facebook are no longer top of mind with consumers?  What about Netflix, LinkedIn, or Pandora?  If history is a guide, it is entirely likely one of these or another equally strong internet property will fall out of favor.  Are we likely to see it left to harvest?  I would bet 100% the answer is no, reinvention will be the order of the day, and revitalization will follow with new products, new services, and creative marketing to support those initiatives, no different from the offline world.

Internet brands are born of talent and passion, they are the very picture of innovation.  So why if they can be invented with innovation can they seldom seem to be reinvented with innovation?  Is the answer to be found in independence vs. acquisition by an umbrella company, where founding talent departs and corporate bureaucracy takes over?   Possibly, but that seems more like an observation to me than a fait accompli.  Just because a young company is bought on the way up or down doesn’t mean it cannot survive a downtown, the question has to be what is being done to address the downturn.  If the downturn is being addressed through a product strategy with talent and passion, there is every reason to believe a new vision can have success.  Just because it hasn’t happened doesn’t mean it won’t happen, we all have reason to want it to happen, because that creates more opportunity for the industry and sends the right message to customers, that we do listen to them and change can happen when we are serious about it.

Optimism as a driving force is always good.  The change that happens in the analog world will translate to the digital world.  When a brand is down, root for reinvention.