Has Microsoft Sent Yahoo Into a Death Spiral?

In trying to buy Yahoo, Microsoft had a clear goal: To be No. 2 to Google in search and advertising. If things keep going the way they are heading, it may well achieve that goal without spending the $50 billion Yahoo would have cost.

The news is that three more of Yahoo’s best executives are leaving the company: Qi Lu, Brad Garlinghouse and Vish Makhijani. That follows the departure of two executive vice presidents, Jeff Weiner and Usama Fayyad.

All this leaves particular disarray in the half of Yahoo that builds services for users. Mr. Weiner headed that area. Two of its crucial groups are search, run by Mr. Makhijani, and e-mail and other communications products, run by Mr. Garlinghouse.

The other half of Yahoo serves advertisers and publishers. Its leader, Hilary Schneider, is expected to take some of Mr. Weiner’s responsibility. In other words: even more disruptive change.

This kind of instability, which no doubt will cause even more organizational turmoil, will further slow down Yahoo just when it desperately needs to show that it can still build products that people love to use.

Yahoo’s decision to have Google sell some of its search advertising while continuing to try to build its own ad systems will bring in short-term cash but it sows doubt about its long-term commitment inside and outside the company.

Potential customers are asking questions about Yahoo’s future. I recently met with a large publisher who was in the process of evaluating whether to renew a contract with Google’s DoubleClick unit to handle its ad serving. The company was looking at bids from Yahoo and Microsoft, but the executive told me that the company was wary of Yahoo because it was not sure Yahoo would be around for the duration of the contract.

If you had a hot start-up, would you want to sell to Yahoo now? If you were a talented engineer would you want to work there? I suspect in either case, you would want to know more about what you were getting yourself into.

None of this needs to be fatal for Yahoo. At some point, the chief executive, Jerry Yang, or more likely a new leader, can stabilize the management team and the strategy and get going. But the longer the company keeps stumbling and shedding good people, the more of an opportunity is created for its rivals, most notably Microsoft.

To be clear, Microsoft didn’t create Yahoo’s malaise. But whatever fragile stability that Yahoo may have had has been entirely shattered by the double whammy of Microsoft’s initial offer and then its decision to pull away just when Yahoo had decided to capitulate.

There is no guarantee all this will accrue to Microsoft’s benefit. Users and advertisers are as likely to move to Google as to Windows Live, MSN and Microsoft’s aQuantive advertising unit.

But whatever Microsoft’s prospects were at the beginning of this year, they are better now, precisely because Yahoo’s are much, much worse.



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