Can Scott Thompson turn Yahoo around?

The struggling Internet giant names the PayPal boss as its new CEO.

By InvestorPlace Jan 4, 2012 1:59PM
By Jonathan Berr, InvestorPlace


If PayPal head Scott Thompson can turn Yahoo (YHOO) around, he will earn a spot among the greatest CEOs of his era. The challenges facing the Sunnyvale, Calif., company are that formidable.


Thompson, who is replacing fired Carol Bartz, needs to bring a 20th-century company into the 21st century -- and fast. He did a good job at eBay's (EBAY) payments subsidiary, boosting users to more than 100 million and helping it generate an anticipated $13 billion by 2013. Yahoo, a diverse Internet portal, is a much different company, and Thompson's learning curve will be short.


Like AOL (AOL), Yahoo makes no sense in today's media environment. The days of portals providing everything from email to photo sharing to international news to music programming have come and gone. Yahoo now must decide what services to keep, which ones to sell and which ones to shut down.


The stakes couldn't be higher. Yahoo lost its ranking as the most visited website to Facebook in 2010 and now is losing advertising dollars to Mark Zuckerberg's company. Data from Google's (GOOG) DoubleClick shows the social network had 880 million unique visitors, followed by Google's YouTube, with 800 million and Yahoo at a distant third with 590 million. Yahoo, whose shares have plunged more than 37% during the past five years, continues to struggle. Data from eMarketer shows that Yahoo's share of display ads was about 13% last year, down from 14% in 2010. Meanwhile, Google's and Facebook's shares have increased.


Another big challenge for Thompson is Yahoo's international business. Some investors such as Third Point LLC have argued -- correctly -- that those assets, such as the 40% stake in China's Alibaba Group, are undervalued. Yahoo estimated the value of the investment in the Chinese e-commerce company at $14 billion. That problem might resolve itself. Alibaba CEO Jack Ma reportedly raised $4 billion to make a deal happen to extricate himself from Yahoo's control. Given that China is the world's largest Internet market, Yahoo will try to continue to have a presence despite the government's heavy hand.


Another big decision for Thompson is about original content. For years, the company tried to assure media companies that it was a friend and that it had no intentions of competing against them. Eventually, it began to change directions because advertisers would pay more money to support information not available elsewhere. Yahoo now publishes lots of original content -- some of it, in areas such as sports and finance, is quite good. Like Tim Armstrong, his counterpart at AOL, Thompson will have to convince his shareholders that the investment is worth it. That will be difficult.


During the third quarter, display advertising revenue excluding traffic acquisition costs (TAC) was $449 million, little changed from a year earlier. The overall results were dismal. Net income plunged 26% to $293 million, or 23 cents per share. Revenue excluding TAC -- the metric used by Wall Street -- fell 5% to $1.12 billion. The results surpassed Wall Street's admittedly already low expectations because Yahoo took market share from traditional media outlets such as newspapers.


That means Thompson will have to find partners to justify Yahoo's original reporting. Last year, Yahoo formed an alliance with Walt Disney's (DIS) ABC News to share original videos -- a big thing on the Internet -- and reporting resources. A good start, but more needs to be done. Yahoo Sports, which last year scored some impressive scoops -- including scandals involving the University of Miami and Ohio State University football teams -- shouldn't have trouble finding another media company to share its costs. The same holds true for Yahoo Finance, its popular business site.


This is the year when Yahoo needs to make itself relevant to today's Internet users. Otherwise, it will be another wreck moved to the shoulder of the information superhighway.


As of this writing, Jonathan Berr did not hold a position in any of the aforementioned stocks.


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