Blog of Intellectual Capital

Here is a very thought provoking article in regards to Yahoo and its future. Very readworthy.

“A source close to Yahoo’s strategic planning recently complained to us that Yahoo has “a fundamental innovator’s dilemma.”

What he meant is that while Yahoo has flat traffic, flat revenues, and increasingly limited growth opportunities, it can’t innovate it’s way out of the problem with bold new products because it has to fund, protect, and iterate on “a big existing business that is, let’s face it, very profitable” — display advertising on Yahoo.com and the company’s other media sites.

So while there is, at Yahoo, “a core group of people who still want [and] believe that Yahoo can change things,” these product directors and line engineers increasingly find themselves working not for a tech company, but for a media company content to serve ad impressions against an already huge Web audience.

Right now, this “innovator’s dilemma” is mostly a mild inconvenience that makes Yahoo a less fun place for Silicon Valley engineers and executives to work (which is why so many are quitting). But someday soon, it could kill the company.

That’s because Yahoo’s entire big, existing, profitable business is dependent on consumers continuing to use the Internet and the “Web” the way they are right now for the foreseeable future. That may be a bad bet.

Just ask Google, which is cranking out $25 billion a year on desktop search, but is scrambling to develop a mobile business anyway. Ask Apple, which used to just make Macs, but now calls itself a mobile devices maker. Or ask our source close to Yahoo who believes “the Web is on a verge of a tectonic shift” and that “the [Web] page as a dominate paradigm is going away.”

Our source believes this upcoming “tectonic shift” presents an opportunity for Yahoo to “leverage and benefit from the next disruption.” We agree. But first Yahoo has to solve its “innovator’s dilemma.”

Here are four possible solutions Yahoo CEO Carol Bartz and Yahoo’s historically inept board of directors could pursue:

Seek a leveraged buyout lead by a large private equity firm such as KKR or Blackstone. In theory, this would allow Yahoo to ignore the quarter-by-quarter scrutiny that forces it to protect its display business above all else and re-invest in innovation. To do it it, a PE firm would have to borrow about $30 billion. The problem is PE firms typically buy a company because they believe they can “strip mine” it down to a single, healthy business and then sell it back to the public as a more efficient machine. That doesn’t sound a like a recipe for innovation to us. Finally, remember when Terra Firma acquired record label EMI in hopes of figuring out the Internet? That was a big nasty old bust.

Sell 20% or more of the company to a mid-stage private equity firm, such as Digital Sky Technologies, Elevation Partners, or whomever else Quincy Smith and CODE Advisers could con into the gig. The new part-owners could kick Carol upstairs into the chairmanship and bring in a product-oriented chief executive, who, unlike the last one (cofounder Jerry Yang) is also able to make decisions. The problem with this option is that it requires co-operation from Carol and the board. Also, it assumes shareholders will provide Yahoo some leash after the deal. The other problem is that the model to follow here is Palm, which brought on a ton of Apple execs after Elevation Partners invested. That experiment failed.

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