3 Ways Yahoo Can Fix Itself

This is the beginning of Year Two for Yahoo (NASDAQ: YHOO ) CEO Carol Bartz, and for investors, it’s hopefully the year the onetime most valuable Web businesses in the world stops “recovering” and begins growing again. Following a quarterly earnings report that offered up a disappointing first-quarter revenue forecast, the conference call focus was on the positive from both Bartz and finance chief Tim Morse, who said revenue should return to year-on-year growth come the back half of 2011. It certainly seems like that may happen. Yahoo’s display advertising sales were up 16% — offsetting a 18% plunge in search revenue — meaning that part of the business is, if not healthy, surviving. Yahoo clearly is clearly still ill, which wasn’t lost on investors, who pushed the stock 3% lower on Wednesday to levels not seen for three months. On Tuesday, the company said it had laid off 1% of its 14,000-strong staff, which came after mid-December layoffs of nearly 700 employees. Yahoo needs a whole lot more than a 16% increase in display ad sales to recover its ailing advertising business as a whole. It still only controls a 16% market share of an advertising business owned by Google (NASDAQ: GOOG ), and beating out AOL (NYSE: AOL ) doesn’t count as a win. How can Yahoo! turn it all around? How can Yahoo return to profit growth that doesn’t rely on firing people? How does it rehabilitate what’s seen as an archaic brand? Bartz sang the same tune during the earnings call she has since she took over the company — Yahoo! needs a “unified purpose.” Rather than buzzwords, here are three specific ways Yahoo could recover that purpose in 2011. Buy or Partner With Groupon While Yahoo spent most of 2010 flailing about, starting a number of different social networking initiatives from integrating Facebook and Twitter tools into Yahoo.com to starting up a new Web portal with Starbucks (NASDAQ: SBUX ), its most promising plan fell through. The company was reportedly in a long bidding war with Google to acquire the online daily deals business Groupon. Yahoo’s bidding reportedly peaked at $3 billion, while Google went up to $6 billion by December. Groupon turned down both and went on to raise $1 billion in private investment in December alone. Even though Yahoo was rebuffed, it should either try to find the capital to make Groupon an offer it can’t refuse, or propose a partnership. Groupon’s Web coupon business is on the verge of a boom, and with Google moving to build its own service, teaming with an established success like Groupon would be a boon to Yahoo, strengthening its identity as an online service business and its display ad sales. Buy AOL One way Yahoo could improve its chances for growth would be to eliminate the competitor with which it’s been fighting for scraps during the past five years. AOL and Yahoo have been plagued by the same problems since Google’s astronomical rise in the middle of last decade. They are both businesses mired by identities and service strategies stuck in the late 1990s, with suites of Web services like email and content pages like sports and games that are simply outdone by competitors. A merger or buyout would improve both companies’ chances of staving off Google and Facebook in the display advertising business, while hopefully allowing them to consolidate and refocus their mutual services. Sell the Search Tools It’s time to give up the search-engine ghost. Its technology is outdated, and is seen by the public as a nostalgia piece more than a functional tool. Yahoo could get itself a nice influx of capital if it finally sold off its search tools entirely to Microsoft (NASDAQ: MSFT ) — the logical evolution of the deal the two kicked off in 2009 to license Yahoo’s search tools for the Bing service. Under that deal, Yahoo took over sales duties for Microsoft’s advertising business. If Microsoft took over Yahoo’s search tools from them, it could sweeten the deal by handing over its weak advertising business and give Yahoo a bump in display advertising market share. At the time of publication, Anthony John Agnello did not own a position in any of the stocks named here.
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