CURRENT EVENTS UPDATE

Yahoo Lowers the Net

By CHRIS TAYLOR/SAN FRANCISCO

Not so long ago, the name of the company that Tim Koogle stepfathered from infancy to manhood deserved its exclamation point. It was a full-throated barbaric howl, the one profitable rebel yell of the Internet that really drove fear deep into the hearts of the old-media infantry. By last Wednesday, when the Robert E. Lee of this rebel force reached his Appomattox, the yell sounded more like an ironic groan. First-quarter sales set to be 40% off last year’s estimate? Ya-hoo. Stock down 92% from its peak, with no end to the freefall in sight? Ya-hooey.

To be fair, Yahoo’s news was just one act in the carnival of carnage that was high tech last week. Cisco and Intel predicted big revenue drops and job cuts, a combination that set the NASDAQ up for a 5.3% fall on Friday. The index is off 59% from its peak, reached a year earlier. Even the good news hurt—unemployment was stable but wages grew, undermining the Street’s expectation that the Federal Reserve will deliver a big interest-rate cut later this month.

Yahoo statistics

What’s different for Yahoo is that since its birth in 1995, the company has known nothing but the occasional hiccup on the way to world domination, and it certainly has never had to cope without its one true CEO, known within the company as T.K. The moment he stepped aside last week, the company shut itself up more securely than a city-state under siege, leaving observers jostling to deliver the most ironic epigram. "There were rumors not so long ago of Yahoo buying Disney," offered Jupiter senior analyst Aram Sinnreich. "Now they’d be lucky if Disney buys them." The company, once worth $134 billion, is now valued at under $10 billion.

How did we get from there to here? On the surface, it’s all about the business cycle, one the tech revolution was supposed to eliminate. Yahoo gets nearly all its cash from online advertising, and this worked very well in the breakneck economy of the past five years. With its 160 million visitors worldwide, everyone wanted a piece of Yahoo’s eyeball universe. But in a downturn, advertising becomes more expendable. Web ads are no exception.

If the apocalypse really had that kind of high school simplicity, however, why didn’t Koogle head it off sooner? After all, here is a genius hailed by e-business author Peter Cohan as "one of the few adults in Silicon Valley," a man who saw the Web’s potential years ahead of most. "My hair is graying because I’ve seen so many business cycles," Koogle joked to TIME last October. But he also displayed alarming signs of true believerism about Web advertising. Disappearing dotcoms made no difference to his bottom line, he said, since traditional companies would pick up the slack. And "the majority of ad spending will be concentrated on the big players"—meaning Yahoo and AOL. (AOL and TIME are part of AOL Time Warner.)

Shock absorbers

What Koogle didn’t see, or didn’t admit to seeing, was mounting evidence that online ads just don’t work as well as their offline counterparts. Few people are clicking on those flashy top-of-the-page banners—0.01% of viewers in recent studies, compared with 0.06% a couple of years ago. Heck, even junk mail gets a 1%-to-2% response rate.

This banner-ad Alamo brings Yahoo’s entire business model into question. Unlike AOL, Yahoo has no Plan B to drive sales. AOL, a service provider as well as a content provider, collects a steady $21.95 a head per month, while Yahooligans get their Internet access elsewhere and are accustomed to paying squat for content. When Koogle gingerly tried to extract even a nominal fee from users of Yahoo’s auction service, 90% of them disappeared in disgust. No wonder he felt like joining them.

The really depressing thing about Koogle’s admitting he’s not up to the task of turning Yahoo around is that it suggests the job needs someone with even more business acumen. Short of cloning Bill Gates or unearthing the DNA of Henry Ford, that’s going to be one tough search. So envy not Jim Citrin, managing director of executive-search firm Spencer Stuart, whose job it is to seek a replacement. "We’re looking for a great leader, a motivator," Citrin says. "Less someone with a particular industry background, and more of an athlete."

Athlete is right. The winning candidate will have to be used to slogging long distances with little reward; he or she may need to be an Olympic-level ego stroker. Because it grew so big so fast with so many of the same people in charge, Yahoo has become notorious for its insular us-and-them culture. Only one executive—Sue Decker, the CFO—has arrived from the outside and walked into a corner office.

Otherwise, the loosely defined inner circle consists of four or five highly talented friends, including Jerry Yang and David Filo, whose brainchild grew to world importance in six years. Think of trying to manage the Beatles, circa 1970. "You can’t come in and start slashing and cutting," says a senior new-media analyst. "You have to respect the Yahoo culture."

A new corporate owner might not feel that way, so it’s hardly surprising that the proud Yahoo culture is fending off potential takeovers with a two-year $500 million stock buyback plan. That will still leave $1.5 billion in the bank, effectively buying time for the company to figure out how to make more money on its own. Certainly Silicon Valley is rooting for Yahoo to stay independent in a world increasingly dominated by the AOL-Microsoft rivalry. "They do have a certain cachet, being the last Switzerland standing," says Sinnreich. Not that cachet alone pleases Wall Street anymore. If Yahoo is going to be Swiss, it had better find some good cheese and chocolate to sell.

—TIME, March 19, 2001

Questions
1. Why did Yahoo’s stock price plummet?

2. According to the diagram at left, in what areas does the U.S. economy remain strong?

TIME CLASSR OOM