The name of the elephant lurking in the purple-painted rooms of Yahoo Inc.'s downtown Toronto offices is an unspoken nine-letter word beginning with M.
However, the looming possibility of being swallowed by Microsoft Corp. isn't the only distraction facing the embattled Internet pioneer.
Even before the software giant launched its $44.6-billion (U.S.) hostile takeover bid for Yahoo, the once-dominant search engine was reeling from layoffs, a sputtering corporate turnaround plan and an online ad market cooling in the shadow of a slowing U.S. economy.
On Tuesday, Yahoo unveiled a new three-year financial plan that raises the company's long-term forecasts and is designed to lend credence to the argument that Microsoft's offer undervalues the company. The unscheduled disclosure predicts Yahoo's revenue, discounting advertising commissions, will balloon more than 70 per cent to $8.8-billion in 2010.
Kerry Munro, general manager of Yahoo Canada, says his staff have kept their focus despite Microsoft’s hostile bid. (Fred Lum/The Globe and Mail)
Microsoft's bid aside, Yahoo's long-term success could hinge on its push to become a leading player in shaping the way people access the Internet on cellphones – a race that, so far, Yahoo appears to be winning.
“They're doing really well in the mobile space,” Pacific Crest Securities analyst Steve Weinstein said. “But that's still an opportunity that is going to emerge in 2009 or 2010; it's not something that is going to be turning the dial for them in the near term.”
Yahoo is taking a different approach to the mobile Web than its competitors, says Yahoo Canada general manager Kerry Munro.
While Microsoft builds market share in the cellphone-operating-system game with Windows Mobile, and Google readies its open source Android OS, Yahoo has opted to focus on the browser experience. “Unlike traditional Web browsing environments, where they tried to take something from the desktop and shove it into a small screen … this was actually built from the bottom up to try and fit the Web browsers,” Mr. Munro said.
As part of its global mobile strategy, later this month Yahoo plans to launch its Internet cellphone suite “Go 3.0” in Canada, a service that includes search, e-mail, mapping and other options, which has been met with high praise from observers in the United States.
The software can already be used on more than 270 cellphones worldwide, including Windows Mobile, Palm Inc.'s Treos and Research In Motion Ltd.'s BlackBerry devices.
“We thought the better way to go was to build an application that runs off the devices,” Mr. Munro said. “You could spend your entire life cutting deals with handset makers like Nokia and Motorola, and then carriers like a Rogers could say they don't want it on their deck. It becomes very difficult for users to just seamlessly pick it up.”
Although Yahoo, based in Sunnyvale, Calif., was the original king of the Internet search business, it has since ceded that crown to Google and has struggled to maintain growth.
Analysts say that Go and the mobile Web represents Yahoo's best chance for a fresh start and its best opportunity to reassert its influence over the Internet, even if full monetization of the mobile advertising industry remains at least two to three years away.
“Just like they were a Web 1.0 leader, now they're a mobile 1.0 leader,” Canaccord Adams analyst Colin Gillis said.
About 23 per cent of U.S. cellphone users reported seeing advertisements on their handsets in February, according to a recent report from Nielsen Media Research. Still, Yahoo must ensure that it continues to build out Go's simple offerings as faster, more powerful cellphones with larger screens, such as Apple Inc.'s iPhone, become the norm, to avoid falling behind the likes of Google once again.
“Go does a good job for thin pipes, but assume that we're going to have fat wireless pipes,” Mr. Gillis said. “Then Go isn't going to be so relevant any more.”
Reclaiming the glory days of the early Internet isn't the only pressing concern Yahoo faces, say analysts, pointing out that a constant string of distractions – including the Microsoft bid – can't help but negatively affect employee morale.
That's far from the reality, says Mr. Munro, who said his staff have been more focused than ever since Microsoft's offer.
“They know it really is just noise,” he said. “Something may happen, something may not happen; it's not for us to decide, so let's just go out and keep doing what we're doing.”
Those employees who haven't been laid off already now wonder whether they are fighting to keep their jobs in a small company or competing for employment in a bigger conglomerate.
Those distractions could languish for months, even if a takeover deal were to be completed sooner rather than later. Lengthy government antitrust investigations delayed the closing of both Google Inc.'s purchase of ad firm DoubleClick Inc. and Thomson Corp.'s acquisition of Reuters. Google has already raised similar objections to Microsoft's plans for Yahoo if the deal is completed.
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