Yahoo created internet advertising. Yahoo was once the #1 home page for browsers across America. But the company has floundered for years, riddled with CEO problems, a contentious Board of Directors and no strategy for dealing with Google which overtook it in all markets.
To much fanfare the Board hired Marissa Mayer, a Google wunderkind we were told, in July, 2012 to mount a serious turnaround. And during her leadership the company’s stock value has tripled – from about $14.50/share to about $43.50. You would think investors would be thrilled and the company would be on the right track.
Only almost all that value creation was due to a stock investment made in 2005 – when Jerry Yang invested $1B to buy 40% of Alibaba. And Alibaba in 2014 became the most valuable IPO in history.
Yahoo today is valued at about $46B. The Alibaba shares being spun out are valued at between $40B and $44B. Which means that after adjusting for the ownership in Yahoo Japan (valued at $2.3B) the core Yahoo ad and portal business is worth between $2B and $4.7B. With just over $1B shares outstanding, that puts a value on Yahoo’s core business of between $2.00-$4.70/share – or about 1/6 to 1/3 the value when Ms. Mayer became CEO.
A highest value of $4.7B for the operating business of Yahoo puts it on par with Groupon. And worth far less than competitors Google ($347B) and Facebook ($212B). Even upstart, and often maligned, social media companies Twitter ($24B) and LinkedIn ($27B) have valuations 5 times Yahoo.
Unfortunately, this latest leader and her team haven’t been any more effective at improving the company’s business than previous regimes. Under CEO Mayer Yahoo used gains from Alibaba’s valuation to invest about $2.1B in 49 outside companies – with $2B of that being acquisitions of technology companies Flurry ($200M), BrightRoll ($640M) and Tumblr ($1.1). Under the most optimistic view of Yahoo, leadership spent 40% of the company’s value in acquisitions that have made no difference to ad revenues or profits.
Soon there will be little left of the once mighty Yahoo. It has pretty much lost relevancy. Large investors are crying for a merger with AOL, whose inability to grow its portal, ad and media businesses has left its market cap at a mere $3.7B. But combining two companies that are market irrelevant, and declining, will probably have the same outcome as happened when merging KMart and Sears. The Yahoo growth stall remains intact, and revenues will decline along with profits as the market continues shifting to powerful and growing competitors Google, Facebook and other social media companies. Only now Yahoo’s leaders won’t have the Alibaba value mountain to hide behind
It is an unfortunate fact that small businesses fail at a higher rate than large businesses. While we've come to accept this, it somewhat flies in the face of logic. After all, small businesses are run by owners who can achieve entrepreneurial returns rather than managerial bonuses, so incentive is high. Conventional wisdom is that small businesses have fewer, and closer relationships to customers (think Ace Hardware franchisees vs. Home Depot.) And lacking layers of overhead and embedded management they should be more nimble.
Yet, they fail. From as high as 9 out of 10 for restaurants to 4 out of 10 in more asset intensive business-to-business ventures. That is far higher than large companies.
Why? Despite conventional wisdom most small businesses are run by leaders committed to a single, narrow success formula. Most are wedded to their core ideology, based on personal history, and unwilling to adapt until the business completely fails. Most reject new technologies and other emerging innovations as long as possible, trying to conserve cash and wait for "more proof" change will pay off. Additionally, most spend little time investing time, or money, in innovation at all as they pour everything into defending and extending their historical business approach.
Take for example the major trend to digital marketing. Everyone knows that digital is the only growing ad market, while print is fast dying: Chart republished with permission of Jay Yarow, Business Insider 3/19/2013
Digital marketing is one of the few places where ads can be purchased for as little as $100. Digital ads are targeted at users based upon their searches and pages viewed, thus delivered directly to likely buyers. And digital ads consistently demonstrate the highest rate of return. That's why it's growing at over 20%/year!
Yet, small businesses continue to put most of their money into local newspapers and direct mail circulars. The least targeted of all advertising, and increasingly the least read! While print ad spending has declined over 80% the last few years, to 1950 levels (adjusted for inflation,) smarter businesses have abandoned the media. At large companies in 2012 38% of advertising is on digital, second only to TV's 42% – and rapidly moving into first place!
A second major trend is the move to mobile and app usage. In the last 2 years mobile users have grown and shown a distinct preference for apps over mobile web sites. App use is growing while mobile web sites have stalled: Chart republished with permission of Alex Cocotas, Business Insider 3/20/13
Even though there are over 1million apps available for iPhone and Android users, the vast majority of small businesses have no apps aligned with their business and customers. Most small businesses, late to the game in digital marketing, are content to try and add mobile capability to their already existing web site – hoping that it will be sufficient for future growth. Meanwhile, customers are going directly for apps in accelerating numbers every month! Chart republished with permission of Alex Cocotas, Business Insider 1/8/13
Rather than act like market leaders, using customer intimacy and nimbleness to jump ahead of lumbering giants, small business leaders complain they are unsure of app value – and keep spending money on historical artifacts (like their web site) rather than invest in higher return innovation opportunities. Many small businesses are spending $20k+/year on printed brochures, coupons and newspaper or magazine PR when a like amount spent on an app could connect them much more tightly with customers, add higher value and expand their base more quickly and more profitably!
The trend to digital marketing – including the explosive growth in mobile app use – is proven. And due to very low relative up-front cost, as well as low variable cost, both trends are a wonderful boon for small businesses ready to adopt, adapt and grow. But, unfortunately, the vast majoritiy of small business leaders are behaving oppositely! They remain wedded to outdated marketing and customer relationship processes that are too expensive, with lower yield!
The opportunity is greater now than during most times for smaller competitors to be disruptive. They can seize new innovations faster, and leverage them before larger competitors. But as long as they cling to old practices and processes, and beliefs about historical markets, they will continue to fail, smashed under the heal of slower moving, bureaucratic large companies who have larger resources when they do finally take action.
With great public fanfare Yahoo hired a Google executive as CEO this week.
The good news is that by all accounts Ms. Marissa Mayer is very hard working, very smart and deeply knowledgeable about all things internet. Ms. Mayer also was extremely successful at Google, which is a powerful recommendation for her skills. This has pleased a lot of people. Some have practically gushed with excitement, and have already determined this is a pivotal event destined to save Yahoo.
But, before we get carried away with ourselves, there are plenty of sound reasons to remain skeptical. Check out this chart, and I concur completely with originator Jay Yarow of Business Insider – the #1 problem at Yahoo is revenue growth:
Let's not forget, this problematic slide occurred under the last person who had great tech industry credentials, deep experience and a ton of smarts; Carol Bartz. She was the last Yahoo CEO who was brought in with great fanfare and expectations of better things after being the wildly successful CEO of AutoCad. Only things didn't go so well and she was unceremoniously fired amidst much acrimony.
So, like they say on financial documents, past performance is not necessarily an indicator of future performance.
What Yahoo needs is to become relevant again. It has lost the competition in search, and search ads, to Google. It is not really competitive in banner ads with leader Facebook, and strong competitor Google. It is no longer leads in image sharing which has gone to Pinterest. It has no game in local coupons and marketing which is being driven by GroupOn and Yelp. For a company that pioneered the internet, and once led in so many ways, Yahoo has lost relevancy as new entrants have clobbered it on all fronts.
Because it has fallen so far behind, it is ridiculous to think Yahoo will catch up and surpass the industry leaders in existing markets. No CEO, regarless of their historical success and skills, can pull off that trick. The only hope for Yahoo is to find entirely new markets where it can once again pioneer new solutions that do not go head-to-head with existing leaders. Yahoo must meet emerging, unmet needs in new ways with new, innovative solutions that it can ride to success. Like the turn to mobile that saved the nearly dead Mac-centric Apple in 2000. Or the change to services from hardware that saved IBM in the 1990s.
Ms. Mayer's entire working career was at Google, so it is worth looking into Google's experience to see if that gives us indications of what Ms. Mayer may do.
Unfortunately, Google has been really weak at implementing new solutions which create high revenue, new markets. Google has been a wild success at search, its first product, which still generates 90% of the company's revenue.
Android is a very important mobile operating system. But unfortunately giving away the product has done nothing to help sales and profits at Google. Yahoo certainly cannot afford to develop something so sophisticated and give it away.
To try turning around the Android sales and profits Google bought market laggard Motorola Mobility for $12.5B. With a total market cap of only $19.2B Yahoo is in no position to attempt buying its way out of trouble.
Chrome is a great product that has selectively won several head-to-head battles with other application environments. However, again, it has not created meaningful revenues. Despite a big investment.
Google+ has its advocates, but it was at least 3 years late to market allowing Facebook to develop a tremendous lead. So far the product is still far behind in its gladiator battle with FB, and produces little revenue despite the enormous development and launch costs – which are still draining resources from Google.
Google has invested in an exciting, self-driving automobile. But nobody knows when, or if, it will be sold. So far, money spent and no plan for a return.
Google glasses are cool. But the revenue model? Launch date? Manufacturing and distribution partners for commercialization?
Google innovated a number of exciting potential product markets, but because it failed at market implementation eventually it simply killed them. Remember Wave? Powermeter? Picnik? Google Checkout? Google answers? Google Buzz? Fast Flip? Google Lively? Squared?
If ever a company proved that there is a difference between innovating new products and launching successfully to create new markets it has to be Google.
So is Yahoo destined to fail? No. As previously mentioned, Apple and IBM both registered incredibly successful turnarounds. Bright people with flexible minds and leadership skills can do incredible things. But it will be up to Ms. Mayer to actually shed some of that Google history – fast.
At Google Ms. Mayer was employee #20 on a veritable rocket ship. The challenge at Google was to keep being better and better at search, and ads associated with search. And developing products, like GMail, that continued to tie people to Google search. It was hard work, but it was all about making Google better at what it had always done, executing sustaining innovations to keep Google ahead in a rapidly growing marketplace.
Yahoo is NOT Google, and has a very different set of needs.
Yahoo is in far worse shape now than when Ms. Bartz came in as the technical wonderkind to turn it around last time. Ms. Mayer takes the reigns of a company going in the wrong direction (losing revenues) with fewer people, fewer resources, weaker market position on its primary products and a weakening brand. Hopefully she's as smart as many people say she is and acts quickly to find those new markets with products fulfilling unmet needs. Or she's likely to end up turning out the lights at the company where Ms. Bartz dimmed them significantly.
