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The Phoenix Principle: Is Yahoo doomed? Probably

Adam Hartung

Adam Hartung

Marissa Mayer’s reign as head of Yahoo looks to be ending like her predecessors.  With a serious flop.  Only this may well be the last flop – and the end of the internet pioneer.

It didn’t have to happen this way, but an inability to manage Status Quo Risk doomed Ms. Mayer’s leadership – as it has too many others.  And once again bad leadership will see a lot of people – investors, employees and even customers – pay the price.

Yahoo was in big trouble when Ms. Mayer arrived.  Growth had stalled, and its market was being chopped up by Google and Facebook.  It’s very relevancy was questionable as people no longer needed news consolidation sites – which had ended AOL, for example – and search had long gone to Google.  The intense internet users were already clearly mobile social media fans, and Yahoo simply did not compete in that space.

In other words, Yahoo desperately needed a change of direction and an entirely new strategy the day Ms. Mayer showed up.  Only, unfortunately, she didn’t provide either.  Instead Ms. Meyer offered, at best, a series of fairly meaningless tactical actions.  Changing Yahoo’s home page layout, cancelling the company’s work-from-home policy and hiring Katie Couric, amidst a string of small and meaningless acquisitions, were the business equivalent of fiddling while Rome burned.  Tinkering with the tactics of an outdated success formula simply ignored the fact that Yahoo was already well on the road to irrelevancy and needed to change, dramatically, quickly.

The saving grace for Yahoo was when Alibaba went public.  Suddenly a long-ago decision to invest in the Chinese company created a vast valuation increase for Yahoo.  This was the opportunity of a lifetime to shift the business fast and hard into something new, different and much more relevant than the worn out Yahoo strategy.  But, unfortunately, Ms. Mayer used this as a curtain to hide the crumbling former internet leader.  She did nothing to make Yahoo relevant, as fights erupted over how to carve up the Alibaba windfall.

When it became public that Ms. Mayer had hired famed strategy firm McKinsey & Co. to decide what businesses to close in its next “restructuring” it lit up the internet with cries to possibly just get rid of the whole thing! After 3 years, and more than one layoff, it now appears that Ms. Mayer has no better idea for creating value out of Yahoo than doing another big layoff to, once again, improve “focus on core offerings.”  Additional layoffs, after 3 years of declining sales, is not the way to grow and increase shareholder value.

Analysts are pointing out that Yahoo’s core business today is valueless.  The company is valued at less than its remaining Alibaba stake.  And this is not outrageous, since in the ad world Yahoo has become close to irrelevant.  Nobody would build an on-line ad campaign ignoring Google or Facebook, and several other internet leaders.  But ignoring Yahoo as a media option is increasingly common.

Investors are rightly worried that the IRS will take much of the remaining Alibaba value as taxes in any spinoff, leaving them with far less money.  Giving up on the CEO, and its increasingly irrelevant “core business” they are asking if it wouldn’t be smarter to sell what we think of as Yahoo to Softbank so the Japanese company can obtain the rest of Yahoo Japan it does not already own.  Ostensibly then Yahoo as it is known in the USA could simply start to disappear – like AOL and all the other on-line news consolidators.

It really did not have to happen this way.

Yahoo’s troubles were clearly visible, and addressable.  But CEO Mayer simply chose to keep doing more of the same, making small improvements to Yahoo’s site and search tool.  By keeping Yahoo aligned with its historical Status Quo risk of irrelevance, obsolescence and failure grew quarter-by-quarter.

Now Status Quo Risk (the risk created by not adapting to shifting market needs) has most likely doomed Yahoo.  Investors are no longer interested in waiting for a turn-around.  They want their Alibaba valuation, and they could care less about Yahoo’s CEO, employees or customers.  Many have given up on Ms. Mayer, and simply want an exit strategy so they can move on.

Ms. Mayer’s leadership has shown us some important leadership lessons:

  • Hiring an executive from Google (or another tech company) does not magically mean success will emerge.  Like Ron Johnson from Apple to JCP, Ms. Mayer showed that even tech execs often lack an ability to understand market trends and the skills to adapt an organization.
  • It is incredibly easy for a new leader to buy into an historical success formula and keep tweaking it, rather than doing the hard work of creating a new strategy and adapting.  The lure of focusing on tactics and hoping the strategy will take care of itself is remarkably easy fall into.  But investors need to realize that tactics do not fix an outdated success formula.
  • Youth is not the answer.  Ms. Mayer was young, and identified with the youthfulness of Google and internet users.  But, in the end, she woefully lacked the strategy and leadership skills necessary to turn around the deeply troubled Yahoo.  Young, new and fresh is no substitute for critical thinking and knowing how to lead.
  • Boards give CEOs too much time to fail.  It was clear within months Ms. Mayer had no strategy for making Yahoo relevant.  Yet, the Board did not recognize its mistake and replace the CEOs.  There still are not sufficient safeguards to make sure Boards act when CEOs fail to lead effectively.
  • CEOs too often have too much hubris.  Ms. Mayer went from college to a rapid career acceleration in largely staff positions to CEO of Yahoo and a Board member of Wal-Mart.  It is easy to develop hubris, and an over-abundance of self-confidence.  Then it is easy to require your staff agree with you, and pledge so support you (as Ms. Mayer recently did.)  All of this indicates a leader running on hubris rather than critical thinking, open discourse and effective decision-making.  Hubris is not just a weakness of white male leaders.

Could there have been a different outcome.  Of course.  But for Yahoo’s employees, suppliers, customers and investors the company hired a string of CEOs that simply were not up to the job of redirecting the company into competitiveness.  Each one fell victim to trying to maintain the Status Quo. And, unfortunately, Ms. Mayer will be seen as the most recent – and possibly last – CEO to lead Yahoo into failure.  Ms. Mayer simply was not up to the job – and now a lot of people will pay the price.

(Adam Hartung is the managing director at Spark Partners. He blogs here.)

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