New leader needed to fix identity crisis at Yahoo!

It feels like the last months of an exhausted leadership, where younger players are jostling for power and influence, and pitching ideas on how to inject new impetus to an ailing enterprise.

No, this is not another description of New Labour, but of Yahoo!, the internet giant whose innovations in the Nineties turned it into the web's most popular site, but which has since become bloated, bureaucratic and threatened by competition on all sides.

Terry Semel is 63. His contract as Yahoo!'s chief executive runs until 2008. Wall Street, though, is becoming increasingly agitated at the poor performance of the company and there are growing calls for an earlier handover.

There are plenty of specific charges against Mr Semel's leadership over the past year - a series of profit warnings; long delays to a new advertising system; failure to clinch a string of acquisitions and partnership deals - but there is one over-arching problem. No one can seem to answer the question, what is Yahoo!?

Is it a web search company? A portal? A media content company? A social networking enterprise? An online services business? An advertising business? It is a bit of everything and, in almost every area, there is a rival doing it better.

An explosive internal memo by an executive just below board level, which was leaked last week, showed just how deep the identity crisis goes. Written by Brad Garlinghouse, it has been dubbed the "Peanut Butter Manifesto" because it argues Yahoo! is spread too thin. "I hate peanut butter," writes Mr Garlinghouse.

The company claims that about half a billion people around the world still regularly interact with Yahoo! in some way, but the harsh truth is that Yahoo! is finding it harder to make money out of this scattered audience.

Yahoo!'s front page was, for so long and for so many millions of people, their gateway to the internet, but this portal concept has gone almost totally out of fashion.

Google is still winning Yahoo! users over to use its web search, and it is far better at making money from selling advertising alongside search results. MySpace and a slew of other social networking websites have trounced Yahoo!'s own efforts in this area (Yahoo! 360*, anyone?). Despite having an early lead in instant messaging, Yahoo! failed to translate that into a substantial offering in internet telephony, ceding the ground to the likes of Skype. And Google again now has its own news and video channels, eating into the audience for Yahoo!'s still impressive content covering sport, entertainment and finance.

Mr Semel, the son of a coat designer and a bus company boss, has been at the helm since 2001 after an executive career in Hollywood that took him to the top of Warner Brothers. While he originally brought calm and sensible management to a company navigating the collapse of the dot.com boom, critics say he has failed to identify a clear vision for the future and a convincing way to turn round a share price that has fallen by a third in the past year. He is forgoing a salary now, in return for extra share options that mean he will be focused solely on getting the stock up, but already vultures - internal and external - are circling.

The leaking of Mr Garlinghouse's memo signals just how aggressively the battle for the soul of Yahoo! is being fought. Reports have described how the memo has "attracted the attention of Yahoo!'s top brass" and Mr Garlinghouse, a senior vice-president and a three-year veteran of the company, has been asked to conduct an internal review of some of the issues he has raised. Its conclusions, indeed its very existence, could seriously undermine Mr Semel.

The leak has echoes of the briefing that fatally undermined Carly Fiorina as chief executive at Hewlett-Packard two years ago and unmasked the extent of boardroom bickering at that Silicon Valley company.

"We lack a focused, cohesive vision for our company," Mr Garlinghouse wrote. "We want to do everything and be everything - to everyone. We've known this for years, talk about it incessantly, but do nothing to fundamentally address it ... I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

Yahoo! has kept schtum on the criticisms in the memo, except to say that its existence is an example of the "open" and "collaborative" approach taken inside the company.

As if to rub another pinch of salt into the wound, Yahoo!'s public self-flagellation is happening at the same time as Google shares soared past $500 apiece for the first time yesterday. When Yahoo! floated in 1996, Google was still only two young guys' research project at Stanford University, but the upstarts' superior technology for searching the web is at the root of so many of Yahoo!'s problems.

The younger company continues to satisfy its users, and as a result wins a bigger share of internet users' search queries. More importantly, it is also better at matching adverts to search queries, making it more likely that a user will click through to the advertisers' website. Each time they do, that generates a few pennies for Google.

Yahoo! is in the middle of a technology upgrade that will improve its search-based advertising technology, but the project - Project Panama - is a year late and over budget, one of the main reasons for the company's 38 per cent slide in third-quarter revenues and its fourth-quarter profit warning. Yahoo! is struggling to catch up, too, with Google's Adsense, which sells search-based and banner adverts to other people's websites and blogs. Panama will be fully rolled out only by the middle of next year, while Google is scooting off into new areas, such as packaging together deals for its customers that take in radio and newspaper advertising as well as online ads.

Youssef Squali, analyst at Jeffries & Co, said that Yahoo!'s deal this weekwith seven major US newspaper groups offers part of the answer to the company's critics. The deal allows their local papers to post jobs on Yahoo!'s HotJobs recruitment website, in return for a revenue sharing deal, and there will be more collaborations over time in other areas of local classified and display advertising.

Mr Squali said: "We believe that Yahoo! is the only company that could have offered the newspapers cooperation spanning online job listings, technology, content, search and online traffic. Thus we believe that this deal attests to the unique breadth of Yahoo!'s offerings and services, which is often criticised for being spread too thin across the whole internet spectrum."

However, it looks increasingly as if Yahoo! will coalesce around some version of Mr Garlinghouse's strategy, cutting out the flab within the company with a programme of job cuts that might extend to one in five of the workforce, and cutting some of Yahoo!'s more obscure projects, such as its online dating site and web hosting for small businesses. The only open question is whether Mr Semel will be the man at the helm.