By Jon Swartz and Scott Martin
SAN FRANCISCO -- Yahoo CEO Scott Thompson wasn't kidding when he vowed to jostle the embattled Internet pioneer out of its slumber.
The company on Wednesday said it would slash 2,000 jobs, 14% of its workforce, and offer a blueprint of its "future direction" during its first-quarter earnings call on April 17. It is Yahoo's fifth significant layoff in five years.
The layoff, Yahoo's largest, is part of an audacious plan to realign the company and target mobile, social and younger users in pursuit of growing its advertising business -- the lifeblood of the company.
"Today's actions are an important next step toward a bold, new Yahoo -- smaller, nimbler, more profitable and better equipped to innovate as fast as our customers and our industry require," Thompson said in a statement. "Our goal is to get back to our core purpose -- putting our users and advertisers first."
But Third Point, Yahoo's largest outside shareholder, said it was disappointed the cuts happened before Thompson laid out his strategic plan.
A slimmed-down Yahoo may be its only hope of surviving the onslaught from Google, Facebook and Microsoft that is eroding Yahoo's advertising and search business. Rumors had swirled for months that something would need to be done at the company. Thompson, the former president of online payment service PayPal, was installed in January to replace Carol Bartz, who was ousted from the CEO post last fall.
For Yahoo, "It's a question of what do you do with a cadaver? Where do you place your organs when you die?" says Damon Vickers, a money manager in Seattle who closely follows tech stocks. Yahoo "lost the search game to Google a long time ago."
Thompson, who was from PayPal in January, told USA TODAY then that Yahoo was going to change "at a high rate of speed, and then we get to change the game a little bit." He mentioned mobile, social media and TV as prime opportunities.
But Thompson inherited a battered brand that is losing advertising dollars to Google and Facebook and whose cachet in Silicon Valley and on Wall Street has diminished despite its enormous audience -- 700 million online visitors per month -- and a net profit of more than $1 billion on revenue of nearly $4.4 billion last year.
Under the announced layoffs, Yahoo expects to save $375 million a year. The company plans to take a pretax charge of $125 million to $145 million in the second quarter for severance costs.
Yahoo's stock inched up 9 cents, to $15.27, in trading Wednesday.
"They have problems, but still command a huge audience with e-mail service, Yahoo Finance and some of their sports and news content," says David Hallerman, an analyst at eMarketer. "The online space is filled with snobbery. Yahoo's audience is trending older than other social sites, which makes them not as hot or chic."
A beleaguered company
Yahoo's woes have some detractors comparing it to a hit cable show. If you guessed Mad Men, AMC's acerbic look at advertising in the 1960s, try again. It's The Walking Dead, an apocalyptic take on zombies in the 2010s.
The meandering company is increasingly likened to a corporate zombie in the tradition of the rags-to-riches-to-rags narrative of Sun Microsystems and AOL, both of which slipped from game changers to also-ran obscurity.
Arguably one of the biggest missed opportunities of the past decade for Yahoo has been social networking. "The writing is on the wall. Yahoo doesn't have social; Yahoo doesn't have mobile," says IDC analyst Karsten Weide, a former Yahoo employee.
Company executives contend that Yahoo has many social-related assets.
"One of (our) interesting assets is the amount of content that jumps from Yahoo that's already in social," Thompson said earlier this year. "We're not starting from zero. We're starting from a position again that can be leveraged. What will social be when it relates to commerce? Everyone is trying to imagine what that might be."
Facebook's enormous growth trajectory forced Google to push out its Google+ social network to be part of the evolving ad landscape. But Yahoo languished without new efforts to capture social audiences. And Yahoo has failed to keep up with Google in ad technology.
"Yahoo has proven unable to be a leader and disruptor in the ad technology area," Mike Walrath, founder and former CEO of Right Media, a company Yahoo bought for $680 million in 2007, wrote on his blog. "Right Media has languished. (Yahoo's advertising platform) has been a failure. Yahoo's legacy ad systems are extremely outdated and expensive to maintain." Walrath resigned from Yahoo in late 2009.
Selling off Yahoo's lackluster advertising technology may not even be an option, say analysts. "Who would want to buy it?" Weide asks.
Plus, Yahoo isn't tapped into any of the hot trends, such as social media, that interest advertisers. "Advertisers are beginning to say, 'Why would I pay a premium?'" Weide says.
- ^Lost ad sales.@ Google and Facebook are cleaning Yahoo's clock, tech analysts say. Google will cement its dominance as revenue for search and online display advertising in the U.S. catapults over the next few years with the growing popularity of smartphones, tablets and social media.
The search king is expected to extend its lead in search, with $20.3 billion in revenue in 2014, vs. $15.2 billion this year. Yahoo will steadily decline to $764 million in 2014, according to eMarketer.
The situation isn't much better for Yahoo in online display ads, though its predicted take of $1.6 billion in 2014 is an improvement from $1.4 billion this year. Google and Facebook, by comparison, will soar to $4.8 billion and $3.8 billion, respectively, in 2014.
"They are not going to be as important, but they will be a money-making enterprise as they leverage a large audience to sell lower-cost ads," says eMarketer analyst Hallerman. "Can they evolve by selling ad inventory at a lower rate?"
- ^Bitter board battle.@ Major Yahoo shareholder Daniel Loeb is piloting an insurrection of Yahoo's 11-member board of directors. He's demanding that four members come from representatives of Third Point, the hedge fund he heads that owns a 5.8% stake in Yahoo.
This is the second time in four years that Yahoo has faced a potential mutiny from a disgruntled board member. In 2008, billionaire Carl Icahn sought to overthrow the board after it shunned a $47.5 billion buyout offer from Microsoft. Icahn settled for two of his choices on Yahoo's board. They and Icahn are no longer on the board.
- ^Patent lswsuit.@
The final indignity may have come in mid-March, when Yahoo sued Facebook over alleged patent infringement. Yahoo claimed the violation of more than 10 patents, including methods and systems for advertising on the Web, according to the lawsuit filed in federal court.
Facebook fired back at Yahoo on Tuesday and accused its rival of infringing on 10 of Facebook's patents.
- ^Brain drain.@
Yahoo's brazen suit -- which marks one of the first major legal battles among technology giants in social media and a major escalation of patent litigation that has already swept up the smartphone and tablet sectors -- raised hackles in Silicon Valley, poisoning any lingering goodwill toward the fallen Internet icon.
The animus prompted one executive to publicly attempt to poach Yahoo employees.
Last month, David Sacks, chief executive of Yammer, a social network for companies, tweeted that he would offer a $25,000 signing bonus to any Yahoo engineer who joins Yammer by mid-May. So far, Yammer has had a couple of takers.
Yammer isn't the only company to snag Yahoos. Google has grabbed many Yahoo employees, according to LinkedIn search results. Google has picked off some high-level talent in the past year, including Anne Toth, now head of privacy at Google and formerly chief trust officer at Yahoo.
Righting an adrift ship
Yahoo needs to finally decide what it is -- a technology company or a media company -- and commit to that strategy, say three former Yahoo executives, who declined to go on the record because it might affect their current companies' business relationships with Yahoo. Any turnaround, they agree, must start with product innovation. And Yahoo has to make better use of valuable assets, such as e-mail, Flickr and Yahoo Finance, they say.
The consensus seems to be that Yahoo's brand name is damaged, and the company is in need of a visionary who can focus it on market segments that make sense.
"There's a feeling that there's too many layers of management and too much cross-reporting, and it's hard to follow through, and that a lot of managers don't take responsibility," says IDC analyst Weide.
"People have said (reorganizations) haven't worked before, why will it work now? Within Yahoo there's going to be alot of skepticism of 'Can it work?'" Weide says.
"There's still a strong value in being the best portal and gluing together the content and functionality that most people want at their fingertips," digital-marketing expert Kevin Lee says. "Sure, a segment of the audience wants to replace a portal homepage with a social-media homepage, but many people still want most of their content curated by professionals, not their friends."
Still, some in online media hold out hope for Yahoo and its well-regarded content, such as sports and finance. "Instead of surmising when the end will come, shouldn't we discuss how Yahoo can be turned around?" asks Mark Johnson, CEO of Zite, a personalized magazine app.
"How do you turn this company, with a big audience, into something sustainable?" Johnson says.