The Tycoon Report

Peanut Butter

Wednesday, November 22, 2006 | Wayne Mulligan

In what has become not only an Internet sensation – but also a "call to arms" for one of the largest and most respected names on the web – the “Peanut Butter Manifesto,” as it’s come to be known, has inspired a wave of press coverage and speculation as to what it means for the future of Yahoo! (Nasdaq: YHOO.)

In a private company memo written about a month ago by Brad Garlinghouse, an EVP over at Yahoo!, this “manifesto” outlines the current problems and potential solutions for them at one of the oldest and most respected names on the web.

(NOTE:  To read this memo in its entirety, visit this site:  http://www.chrisabraham.com/2006/11/peanut_butter_m.html)

Whether Garlinghouse’s objective was to institute a wave of change over at the Internet behemoth, or set himself up to be the first in a long line of “head rolling”, as he refers to it, the man certainly got some attention this week.

It seems no matter where I turn or what web site I visit, there it is:  Yahoo!’s Peanut Butter Manifesto.

The term “peanut butter” was a phrase used within Yahoo! to describe its strategy of investing equally over a myriad of different businesses – similar to the way peanut butter is spread evenly over a slice of bread.

But according to Garlinghouse, Yahoo! has it ALL wrong!

His contention is that Yahoo! shouldn’t apply the peanut butter approach to its business - this approach has given the company a lack of focus, leadership and drive.  He complains that nobody over there is accountable for the initiatives that they're a part of.  He argues that this keeps a lot of the "dead weight" on board, while the fresh talent runs for greener pastures.

This really messes up Yahoo!'s compensation system, and that, in turn, gives Yahoo! a bloated overhead and cost structure.

Basically, it’s time to chuck the peanut butter and go right back to the peanuts!

Go right back to what makes companies like Yahoo! great – find a few key areas to focus on and then execute your butt off around those areas!

It worked for Google (Nasdaq: GOOG) with search; it’s worked for Microsoft with Operating Systems; it should work for Yahoo! too.

Here’s a company that had the whole world – or should I say, the World Wide Web – in the palm of its hand and watched it slip away.  That is the definition of a “Munson,” my friend – and if you’ve never seen the Woody Harrelson and Bill Murray movie, Kingpin, you’ll have to forgive me because you definitely won’t get that joke.

But, in any case, Yahoo! had it all when the company first acquired Overture – the first company to ever allow advertisers to bid on banner ads inside search engine search results.

But then Google came along and snatched the entire industry away from them!

Pretty darn sad, if you ask me…very sad, but very true.

Now that company’s business is dying on all ends – advertising revenue in its core segments such as finance and auto are down big this year.

The company has had a major setback in rolling out its own ad platform to better compete with Google’s.

And after reading this memo, it seems that the company has a lot more problems internally than meets the eye.

But now that these problems have been brought to the forefront, what is a company like Yahoo! to do?

Management has a couple of options.  They can confront the brutal realities of their situation and chart a new course for their business.  Blaze new trails, divest all non-core business, and streamline internal technologies.

For a company that’s based around a technology like the Internet, it blows my mind how fragmented a strategy Yahoo! has in place.

I mean, the company spends millions of dollars acquiring companies like Del.icio.us or Flickr.com only to launch its own competing products – where’s the sense in that?

And if the company is supposed to be a media company – well, at least that was the gist of things when they brought Semel on as CEO – then why on earth has it taken them years to finally acknowledge that Google has a better advertising product, and why has it taken them even longer to make something comparable?

We’re not talking about some old-line company that has a century of bureaucratic layers to break down to get decisions made.  This is Yahoo!  The most visited site in the world!

Yet, for the last few years, this company has done nothing but disappoint.

So, is it over for them?

Should Yahoo! throw in the towel?

In this writer’s opinion, not just yet!

I think this old girl still has a few tricks up her sleeve, and she won’t be afraid to use ‘em.

Now that the cat’s outta the bag, and the company has to either “innovate or die” – I had to steal a line from Joseph Schumpeter, my favorite Austrian economist – my money is betting that Yahoo! will innovate!

This company needs to take the following measures (I’ve obviously taken a few of these from the “manifesto”):

1. Chop its headcount and remove redundant positions.
2. Integrate its acquisitions directly into its core offerings – stop trying to compete against itself.
3. If advertising is its game, then appeal to advertisers – give them all of the tools they want and don’t charge them a penny for them.  Yahoo! has one of the largest merchant directories in the world – all of them need to advertise and they all need to track their sales.  Give them the right software, and they’ll never leave!
4. Focus on breakthrough technologies – ditch everything else:  This means focus on Mobile, Instant Messaging, E-mail, and organizational tools (bookmarking, calendars, etc.)

Then EXECUTE, EXECUTE, EXECUTE!

This isn’t to say it’ll be an easy process – and it doesn’t necessarily mean that Yahoo! will succeed.  The company is facing stiff competition from the likes of Google and MySpace (Nasdaq: NWS.)  But at least it’ll finally be on the right track!

The stock is still trending lower, and it’s not cheap enough to buy strictly as a value play.  But if the price keeps dropping and Yahoo! makes some decisive moves over the next two quarters, this company will be a screaming buying opportunity.

This is one of the few companies that really has the Internet embedded in its DNA – it’ll be very difficult for it to outright fail.

Yet, it’ll be even more difficult to completely succeed.

We’ll have to see if Mr. Semel listens to some of his lieutenants or plays "the ostrich" and sticks his head in the sand.

For me, I think those crazy Yahoo’s will step up to the plate and knock one outta the park!

What do you think?




Wayne Mulligan
Contributing Editor
The Tycoon Report