Don't be a Yahoo! Lessons from the steady decline of Yahoo!

Yahoo! fired its 3rd CEO in 3 years, with the latest CEO's term lasting about as long as my college internship. There's no denying that Yahoo! is in trouble, but the surprising thing is that Yahoo! has been in trouble for a while. Yahoo! never really recovered from the dot-com recession, and has been steadily losing market share and users, stumbling along and just about surviving. What can we learn from Yahoo!'s predicament?

An Identity Lost

What is Yahoo! and what does the company do? That question hasn't had a coherent answer for almost a decade now. The best answer was probably "Yahoo! is a web portal". This is unfortunate, because the word "Portal" was last relevant about 10 years ago. While defining a company's identity and what it stands for sounds like some senior-management exercise with no real-world value, the truth is that it matters a lot to the rank-and-file employees. In fact, it matters not just to employees, but also to your customers, investors, your peers and most importantly, your ability to attract talent.

It is amazing how closely correlated the movement of talented employees is to a company's success. A few quarters after a company loses it sheen as a good employer and employees start to abandon the company, its fortunes start to tank. And unless you are able to communicate what it is that your company does and what it stands for, employees work without any sense of purpose. Facebook, Google and Microsoft all have strong identities, and everyone knows what they stand for. This makes it very clear for employees and job seekers to know where to go. If you're a passionate engineer that wants to work in social, you go to Facebook. You have enterprise ambitions, Microsoft is the place for you. What does Yahoo! stand for? What kind of people should work at Yahoo!?

Without a good answer to that question, you are going to have a lot of trouble hiring and retaining good employees.

Deal-making

Not only has Yahoo! struggled to create an identity, it tried to augment the company by making a whole string of acquisitions that ultimately led nowhere. Delicious, Flickr and Zimbra were all acquisitions that Yahoo! made that just withered out. Yahoo's Wikipedia page lists 64 acquisitions till date, and there is absolutely no pattern in that list. It didn't seem like Yahoo was working towards any overall goal at all. It just bought companies that it liked and left them to find their way in the giant maze that is Yahoo!.

A little known fact is that Yahoo! almost bought Facebook in 2006. In fact, Zuckerberg had informally agreed to be bought by Yahoo! for $1 Billion. But an abrupt fluctuation in Yahoo's stock price reduced the deal's value, and Zuckerberg walked away from the deal. If Yahoo! had in fact bought Facebook for 1% of what it is worth today, it would almost certainly have died a slow and painful death inside Yahoo!

And of course, there is the huge blunder in 2008 when Yahoo rejected Microsoft's $33-a-share acquisition offer. The share price is now less than half, at $15. Steve Balmer now says that he "Dodged a bullet" and "Got very lucky!" that the deal didn't happen, otherwise Microsoft would have had to deal with the huge pile of mess that is Yahoo! today. Instead, Yahoo is now outsourcing its search to Microsoft, which is what Microsoft wanted in the first place.

This confused state of deal-making points to a lack of agreement and coherence at the top levels of the company. It seems like each part of the company is acting independently, often not knowing what the other part of the company is doing, without anyone looking over the big picture and whether things are making sense.

Too many Pies

Can you count how many products Apple has? You can count that number on your hands. Do you know how many Yahoo! has? That number is in the hundreds. Yahoo had, in fact, shut down 50 properties earlier this year, and even that barely made any dent in Yahoo's vast empire of products. The truth of the matter is that Yahoo! has too many fires cooking too many products. And most products have nothing to do with each other, and rarely work together in any way. With such a diversified portfolio, it is impossible for Yahoo! to focus on anything, consequently it does nothing well.

This is a very valuable lesson, especially for startups. There is always this temptation to diversify - Create new products and brands to take advantage of new markets or customer segments. If you do this without having a solid, well functioning core product, you're very likely to get distracted and do neither product well. As a thumb rule, companies should spend 70% of their resources on the core product, with the other 30% on non-core and experimental products.

Yahoo! doesn't even have a "core" product, let alone the focus on it, and it is no wonder that Yahoo! doesn't have even one outstanding product today.

What's Next?

At the end of the day, there is no easy way out for Yahoo! It's going to go through another round of very painful layoffs and closures. Yahoo! needs to ditch at least half of its products, identify what it wants to focus on, and pick the top 3 products that it will spend all its energy on and make those work. Without that, it's going to be the end of the road for what was once the Internet's pioneer.