Why Is There a Yahoo: Does Wall Street's Scorn Mean It's On the Right Track?

Yahoo has announced that it is going to sell it's stake in Alibaba, arguably the best investment ever made by a company intending to help a fledgling enterprise that now dwarfs its former benefactor.

This has raised all sorts of questions about Yahoo's future, but perhaps more pointedly, about its very existence.

Who needs Yahoo? And is that ostensible need sufficiently monetizable to be worthy of further effort?

Wall Street is skeptical. But they get paid for making deals and financing transactions. The money Yahoo will realize from the Alibaba sale will presumably go into growing the current business and making some tech acquisitions, business that is increasingly done by savvy tech executives themselves without the dubious benefit of financial innovators' advice. Not much there for the 'greed is good' types.

So Wall Street would rather see Yahoo sold for parts. Trades from which they could presumably siphon off some fees.

But as the following article explains, a look at Yahoo's audience and its potential to grow same suggests that there is a there there. Not necessarily a hip, sexy market attuned to all the latest nuances of digitalia, but a big - and get this - well endowed crowd made up of the slightly older and/or slightly needier who don't fly around the web with ninja-like grace.

The reality is that Yahoo's strategy could finally begin to pay off. As evidence it is worth noting that the fastest growing segment on Facebook is the 40+ demographic. And Amazon has been defying Wall Street's increasingly strident demands for years. Copying from those two? You could do worse. JL

Hannah Kuchler and Richard Waters report in the Financial Times:

Yahoo’s value resides in a mainstream, middle-of-the-road audience that is often overlooked by Silicon Valley. The biggest problem was to keep these users happy: “The fact that the traffic’s gone up speaks volumes. The revenue will follow.”
Why Yahoo? That has been a perennial question for Silicon Valley in the 15 years since the dotcom boom, when the internet portal had its moment in the sun. Yahoo was once the storefront of the internet, a place where the first generation of online users turned for information or entertainment.

It has long been in need of refurbishment. A series of online innovations involving search, social networking and mobile have largely passed it by and it has not reported a year of revenue growth since 2008. Now, as it prepares to shed its stake, worth around $32bn, in Chinese ecommerce company Alibaba — the asset that has supported its share price and kept investors happy for years — the question is back with a vengeance.

All these years later, he adds, it is still searching for an identity. “I think the fundamental problem is, what is Yahoo?” His own suggestion, having watched the company wrestle with that question from the inside: “Split it up.”Nigel Morris, an executive at the Dentsu Aegis Network, an advertising agency, puts it even more bluntly: “There is no need for Yahoo.”

The existential questions surrounding the company have fuelled one of Silicon Valley’s longest-running soap operas. A succession of chief executives have tried to find a way to build a growth business out of what is still one of the internet’s largest audiences, at 575m visitors a month.

Marissa Mayer, the former Google product manager who has been in charge for two and a half years, is moving closer to her own moment of truth. Last month, she disclosed plans for a tax-free spin-off of her company’s stake in Alibaba, handing its investors a slice of the Chinese ecommerce group. Yahoo’s shareholders had clamoured for such a move, which the company thinks could save it a tax bill of $16bn.

Alibaba spin-off

Although it has slipped in recent days the rapid inflation in the Alibaba share price has kept shareholder unrest at bay and headed off some of the hard questions. Stripping out the Alibaba stake, however, is about to leave Ms Mayer fully exposed to the nagging doubts about Yahoo’s core business.

“Yahoo was like a dry cleaning-laundry corner store that one day discovered it had a gold mine below it,” says a senior New York banker. “Now it has got rid of that gold mine and it’s gone back to being just a dry cleaning and laundry corner store.”

Its original purpose was to offer a helping hand to the inexperienced web surfer who would wash up at the site and find email, news, weather and sports in one place. The company’s many sceptics question its purpose now that companies such as Google, Apple and Facebook have come up with more addictive ways for people to communicate or be entertained online. To put itself back at the forefront of the internet, Yahoo needs to take radical steps to become relevant to “millenials”, says Mr Morris.

Yet to Ms Mayer’s supporters, criticisms like these miss the point. Yahoo’s value resides in a mainstream, middle-of-the-road audience that is often overlooked by Silicon Valley, says one person who has observed her at first hand.
The biggest problem for Ms Mayer was to keep these users happy, this person says, adding: “The fact that the traffic’s gone up speaks volumes. From a mobile perspective, they’re starting to do well. The revenue will follow.”
Ms Mayer’s room for manoeuvre appears to be shrinking fast. As they look beyond the shedding of the Alibaba stake, investors are starting to focus on how to squeeze more juice out of what is left of Yahoo.

Activist investor Starboard Value has called for Yahoo to consider a merger with AOL, another faded star of the first internet boom, as a way to slash costs. That idea has been proposed several times but rejected: ramming Yahoo together with a company that has also struggled to keep up with online trends would make no sense, says one analyst who has studied it: yet the mere threat is a reminder to Ms Mayer of the limited patience of investors.

Investment bankers and private equity groups, who have circled Yahoo for years hoping for the chance of a profitable acquisition or buyout, are licking their lips. The Alibaba holding had put the company out of reach of most acquirers. But after deducting the $32bn value of that stake, along with an estimated $7bn interest in Yahoo Japan, Yahoo’s stock market value of around $41bn implies little value for its core business, even though it is generating about $1bn in operating cash flow a year.

Competing visions

Investors are in effect debating two visions for the business: whether it should reinvest for growth, or milk its existing properties for cash, cut costs and return money to its shareholders.
The second of these arguments has been in the ascendant. Investors praise Ken Goldman, Yahoo’s chief financial officer, and hope that he will help push an agenda not just of handing Alibaba’s cash back to shareholders but leveraging the balance sheet through the issue of bonds or convertible debt and passing that money to shareholders, too.

“I don’t know that management speaks with one voice,” says one shareholder. “Ken has been pushing the share buybacks with the board. Marissa is really focused on growth. She quotes Steve Jobs, and Larry [Page — Google chief executive]. She does not quote media executives who have created value by leveraging up and merging or spinning off companies.”
To turn the tide, Ms Mayer must solve a conundrum that has hampered Yahoo since the end of the dotcom boom: whether it is at heart a media or a technology concern. Terry Semel, the former Hollywood executive who ran it after the dotcom crash, pushed Yahoo towards becoming a fully fledged media company. Ms Mayer has tried to drag Yahoo back to its technology roots. Yet she has been forced to pay equal attention to the needs of the media business, investing heavily in bringing in star power to enhance its news service.

She has used a series of small acquisitions to recruit the developer talent Yahoo needs to rediscover its cutting edge. Since her appointment, she has shifted the company’s developer focus to mobile, redesigned every app and spent $1.6bn on acquisitions including the purchase of blogging site Tumblr.

“The tech boom is almost hurting it,” says Robert Peck, analyst at SunTrust Robinson Humphrey. “It can’t make an acquisition or innovate as quickly as some of these start-ups. If there wasn’t a tech boom she could maybe use her product skills, scooping up small companies and not being outmanoeuvred by them. But there is so much capital.”

Demonstrating that she can bring revenue growth back to Yahoo is proving equally demanding. Yahoo’s traditional business in online display advertising has faded in the face of new formats such as video and social media. Ms Mayer points to the four key areas — mobile, video, native advertising (in-stream ads designed to mimic content) and social — which grew at a rate of 100 per cent last quarter and are forecast to contribute $1.5bn to revenue in 2015.
“We’ve built these businesses from the ground up, at the same time as growing our traffic and presence on the world stage,” says Kathy Savitt, Yahoo’s chief marketing officer and head of media. That amounts to a “pretty extraordinary” two years that has made Yahoo feel like the “world’s largest start-up”.
Ms Mayer has said these new sources of revenue could balance out the drop in display advertising revenues this year.

A big opportunity to boost income could be close at hand. Later this month, Yahoo will have the first chance to try to renegotiate a deal struck five years ago with Microsoft, under which the software company supplies the technology and advertising sales for Yahoo’s search service — a business that accounted for 39 per cent of revenues last year.

The arrangement has failed to live up to Yahoo’s hopes, with Microsoft proving less effective at selling search advertising than Google. Satya Nadella, Microsoft’s chief executive, could be forced to offer big concessions to extend the relationship rather than risk seeing Yahoo defect to Google, according to one of Ms Mayer’s supporters.

She can already point to momentum in the search business. In December, Yahoo’s share of searches in the US jumped above 10 per cent, its highest level since 2009, after it displaced Google to become the default search in the Firefox browser.
Despite this progress, Ms Mayer ultimately faces the same problem that has bedevilled her predecessors for years: how to turn Yahoo back into an industry leader. A decade ago, buying sites like Flickr was seen as the way to inject new energy and ideas. “It was very hard for us to get resources to grow,” says Mr Butterfield, who continued to run Flickr after it was swallowed up but resigned in 2008. Its nine employees were drowned out by the bureaucracy and infighting of a 10,000-strong company, he says.

Problem brand?

Sceptics say Ms Mayer will also need to solve a paradox that her predecessors failed to tackle. The Yahoo brand, though one of the company’s best known assets, may also be one of its greatest hindrances. “It has this legacy of a 20-year-old brand that meant something in the 1990s and they are still trying to make something of it today,” says Mr Morris. Instead, he says, the company should be “looking at the assets they have acquired and can acquire and doing something very different with them”.
Ms Mayer has yet to deliver the knockout hits she was hired to create, whatever the branding. Her supporters argue that this is still early for a turnround of the scale needed at Yahoo, and that stabilising the business has been a first step.
She has hinted that the company has its own chat app in the works — something that would rival services from Facebook, WhatsApp and Snapchat. Yahoo is also experimenting in the increasingly fashionable field of “anticipatory search”, where information is automatically fed to users at the times they may need it.
A breakout hit from an initiative such as this would do wonders for her claim that Yahoo’s shareholders need just a little more patience. But, after recent disappointments, no one is ready yet to give her the benefit of the doubt.
Additional reporting by Stephen Foley and James Fontanella-Khan
An internet history: Where Yahoo is going...

Search

Yahoo was first the web portal but its role in guiding users through the internet was lost to Google. Now, it uses Microsoft’s technology to run search queries, a deal which it is poised to renegotiate to get a better return on advertising.

Mobile

When Marissa Mayer arrived at Yahoo she was shocked to find so few of its engineers working on mobile applications. Since then she has revamped every app and bought in engineering talent through acquisition and recruitment.

Social

Yahoo Messenger was one of the first social products on the internet but it missed the move to networks like Facebook and Twitter. To catch up, it bought Tumblr for $1bn and is hinting at creating its own chat app.

Native ads

Yahoo’s display advertising business is in decline as marketers reject banner advertisements. Instead, they are turning to in-stream adverts that work well on mobile devices.
...where Yahoo has been

Alibaba

Paying $1bn and swapping its own struggling Chinese operations for 40 per cent of ecommerce company Alibaba nearly 10 years ago turned out to be one of the best internet investments ever made. Once Yahoo sheds its remaining stake it will lose the asset that has come to account for most of its value.

Media interests

From sports to finance and weather to horoscopes, Yahoo stretched its brand across many of the web’s first media properties. But it missed the rise of user-generated content on sites like YouTube and Facebook.

Acquisitions

From the proto-social network GeoCities in 1999 to photo site Flickr and social bookmarking service Delicious in 2005, Yahoo has tried to use acquisitions to catch up with online trends. None has taken root.

Yahoo homepage

The original front door to the internet, Yahoo’s homepage crammed in links to entertainment and news and is still one of the most visited sites. But most internet users are now more likely to turn first to their Facebook page or smartphone apps.
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Investors: Activists urge deal but Mayer retains significant backing
The debate over the future of Yahoo reflects divisions on its shareholder register, which looks somewhat different from companies of a similar size, writes Stephen Foley. David Filo, co-founder of the company, remains its largest investor, with a 7.5 per cent stake. There are also large hedge funds among its top 20 shareholders, as well as the more traditional institutional asset managers who are much more reluctant to press their views on management.

Yahoo’s financial results led analysts to cut forecast earnings from the company’s core business this year, handing ammunition to Starboard for the next phase in its activist campaign.

Jeff Smith, Starboard founder, has argued not only that Alibaba needs to be spun out in a tax-efficient manner, but that Yahoo should pull back from large acquisitions to focus instead on cutting costs, and that merging with rival AOL would unleash $1bn in savings. Under the plan, AOL chief executive Tim Armstrong would replace Marissa Mayer.

Starboard also owns a stake in AOL but it is not the only investor supporting such a combination, not least because it would divert management’s attention from further venture capital-style acquisitions of fast-growing websites such as Tumblr that remain far from profitability. “The AOL idea is a good one,” says one major shareholder. “There are duplicate sales forces, duplicate technologies serving up ads, duplicate marketing budgets [and] most of these costs could be wiped out.”
Investors are divided, however, on how aggressively to pressure Ms Mayer, at this stage. Another large shareholder said they were concerned over the potential effect on morale at Yahoo if there were a management switch.
“It is too early to be calling time on the current management,” the shareholder says. “It is important staff believe in the leadership and we believe that this is the case at Yahoo. The fact that someone is a good executive of one company does not necessarily make them a good CEO of another with a different business and a different culture.”