It's been a week or so since Yahoo booted its CEO Scott Thompson for lying on his resume, and replaced him with Ross Levinsohn.
Levinsohn's title is "interim" CEO, but the impression we get is that it is his job to lose.
So, what's his plan?
We spoke to sources close to Yahoo and its board, and we think we have a pretty good idea.
These sources asked to remain anonymous because they don't want to be fired and they would like to remain "close" to the Yahoo and its board.
The basic outline is this: Levinsohn is, in the short term, going to ignore his own passion for big deals to solve some noisy problems and focus the company. Meanwhile, he'll begin to divest assets in order to build up a pile of cash. Then he's going to swing for the fences, hoping to propel Yahoo into growth even though its core product has already begun to erode.
The Next Few Weeks: Quiet The Noise
There is a lot of noise around Yahoo right now due to four issues in particular: its patent dispute with Facebook, its search deal with Microsoft, fallout from Scott Thompson's resume scandal, and activist shareholders looking for new management to "unlock shareholder value." Yahoo also needs to win back its Madison Avenue ad-buying clients, which were a bit offended by the appointment of a non-media guy like Thompson. But that should be easy to do, considering Levinsohn's sterling reputation among that crowd.
Thompson Scandal: The investigation into Thompson's resume scandal is out of Yahoo management's hands. It's the board's responsibility. There is going to be some more fallout. If people at Yahoo knew about Thompson's resume lie, covered it up, and willingly allowed Yahoo to file incorrect documents to the SEC, heads will roll. We've heard specific names of people who might get canned, but so far it's just gossip and it would be irresponsible to share those names here. Just know: Some of them are near the top.
Facebook: New management recognizes that Scott Thompson handled Yahoo's patent dispute with Facebook rather poorly. While you shouldn't expect Yahoo to pull its lawsuit right away, do expect new management to leverage its deeper personal ties with Facebook to arrange some sort of settlement. New management greatly admires the way Tim Armstrong handled selling some of AOL's patents to Microsoft for $1 billion. Our bet is that Yahoo will figure out a way to profitably join Microsoft and Facebook's patent alliance against Google.
Microsoft: Nobody—not Yahoo management, not Yahoo's board, not Yahoo shareholders—is happy about how the search deal Yahoo made with Microsoft back in 2009 has turned out. But the deal is not going away, and there is little way for Yahoo to get out of it. During his short tenure, Scott Thompson threatened to take Yahoo's business to Google. That ploy will not be tried again. Says a source: "Nobody is pleased with how we're doing, but we're in bed together." What's the solution? One has not been decided upon yet! One possibility that has been floated, however: Yahoo could re-do the deal as part of a larger deal in which it combines with MSN and sells some of the technology pieces of its "ad stack" to Microsoft or perhaps its investment, AppNexus.
Activist shareholders: With a 5 percent stake in Yahoo and the power of the pen (plus a pretty good grasp on how to Google), Third Point hedge fund manager Dan Loeb brought Scott Thompson down by exposing his resume lie, got himself a seat on Yahoo's board, and installed a new CEO. And now, after pillaging Big Purple's castle, he wants some loot. He's going to get it. Yahoo has finally agreed to sell back its portion of Chinese Internet company Alibaba to Alibaba. It will get 40 percent of that sale now and walk away with about $4 billion in cash. As much as new Yahoo management would prefer to deploy that money toward strategic ends, it will go to Yahoo shareholders in the form of a stock buyback or perhaps a straight up dividend (it has not been decided which, contrary to reports). Despite this, Yahoo management has plenty of ideas for how it might be able to stockpile some strategically-deploy-able cash in the medium term.
Medium Term: Calm Everyone Down, Sell Stuff, Hoard Cash
Yahoo has some serious long-term issues, which we will get to in a moment.
First let's talk about how the company plans to prepare addressing them in the next few months.
Ross Levinsohn is famous for the deals he has pulled and the ones he has tried to make.
At News Corp., he convinced Rupert Murdoch to buy MySpace. Then he went ahead and paid for the deal in a single blow, selling MySpace's ad inventory to Google for nearly a billion dollars.
Later, Levinsohn tried to buy Digg for News Corp., but the deal fell through. Last fall, he tried to get Yahoo to buy Hulu, but the board wouldn't get in line.
So yes, you can be certain that Levinsohn will try to fix Yahoo through acquisition.
But not right away.
There are two reasons for this:
- Levinsohn is said to believe Yahoo, as an organization, would not be able to properly integrate a major acquisition at this moment. The place is in chaos. It's on its sixth CEO in five years.
- Yahoo doesn't have the cash to make a big bet.
Levinsohn will address Yahoo's organization problems by first addressing some of the "noisy" issues we outlined above, and then by focusing the company around a mission: to be the world's premier digital media company.
Here's how Yahoo management plans to solve the cash problem:
- Alibaba cash. Though Yahoo has promised to use the first $4 billion it got for selling Alibaba on shareholder buybacks or dividends, it has different plans for the remaining 23 percent or so of the money it will eventually recoup in the deal. That cash is going to Yahoo's bank account.
- Yahoo may still also sell its stake in Yahoo Japan. That money has not been promised to Loeb and other Yahoo shareholders.
- Yahoo still plans to sell some of its ad technology. As we mentioned above, New York-based ad tech powerhouse AppNexus is a likely buyer, in part because Microsoft is an investor and we can imagine the Yahoo-MSFT-FB alliance deepening as the companies work out patents and search. We've also heard Accenture is interested.
- Patents cash. Yahoo hopes to extract dollars from Facebook through a more friendly negotiation over patents. One can imagine Microsoft getting involved.
Long Term: Find A Way To Re-Engage Users
Yahoo is still a very big business with products that are used by 700 million people.
That said, it has two serious long-term issues.
- Web-based email is on the decline.
- Mobile computing is on the rise.
How Yahoo's business works right now is that people go to Yahoo.com to check their email, and while they are there, Yahoo shows them links to other Yahoo.com pages that have "premium" brand advertising on them.
The problem is that increasingly, young people do not use email (they prefer texting and chatting on Facebook) and everyone else checks Yahoo email from their iPhones, where there are no links.
Meanwhile, Yahoo is a Web-dependent company at a time when Internet usage is moving toward mobile apps and platforms.
So, what Levinsohn has to do is figure out something Yahoo can make that will replace email as the reason to go to Yahoo.com and Yahoo apps.
From what we understand, he already has some ideas about a two-step solution.
The first step will be to turn Yahoo into a media company—actually, to just admit that it already is one.
Then Levinsohn can focus it on making content that will grab people's attention and get them coming back for more (whether that be to Yahoo.com or Yahoo apps).
We understand he will invest most heavily in Yahoo Sports and Yahoo Finance, with an eye toward video content, which garners much higher ad rates than text-based content.
The solution in mobile is trickier.
We've heard two ideas from sources. One is that Yahoo could build out a "network of apps" that cross-promote each other through a central hub: the Web browser for iPads that Yahoo launched yesterday.
Another idea that isn't mutually exclusive: Levinsohn will get to finally act like himself and make a big deal.
One source suggested that Yahoo could use that big pile of cash we talked about before to acquire a mobile aggregation platform like Flipboard or Pinterest.
To us, the strategy sounds aggressive and smart. It's far better than the one put forward by Levinsohn's predecessor, Thompson, who seemed afraid of the fact that Yahoo is already a media business.
Our only complaint is that Loeb and his merry band of activists crave cash now. Buybacks and dividends are nice in the short term, but if Yahoo could start playing offense now, it would be able to fix itself for the long term sooner. Whatever Yahoo needs to buy now will only be more expensive when it finally has the cash to go after it.
Still: Yahoo has a plan, and considering where it's been the past few years, that's remarkably good news in itself.
