Even Under New Captain, Yahoo Seems Adrift

SAN FRANCISCO — The board of Yahoo, the ailing Web portal, hired Carol A. Bartz as chief executive to apply a little shock therapy.

Carol Bartz, chief of Yahoo. Despite rumblings, Yahoo has a huge audience and is profitable.

Now, nearly two years later, the patient is still suffering from many of the same symptoms: a stagnant business, shrinking market share and a shortage of innovation.

The relative good will that greeted Ms. Bartz when she started at Yahoo is wearing thin. Her turnaround plan has yet to produce significant results, prompting skepticism about her strategy and whether she is right for the job. A number of key executives have recently left.

“She’s been there long enough that you have to question her ability to have the impact that’s needed,” said Lou A. Kerner, an analyst with Wedbush Securities. “But I don’t think there’s any easy fix.”

The news last week that private equity firms were trying to put together a bid for Yahoo adds to the pressure on Ms. Bartz. Those efforts are very preliminary, however, and the success of any deal would depend on several companies agreeing to a complicated transaction, according to sources familiar with the matter who requested anonymity because of the confidential nature of the discussions.

Ms. Bartz has long warned that reviving Yahoo will take some time. She is trying to reverse a slide years in the making, one that analysts say was caused by slow decision-making, stiff competition and a failure to capitalize on the social networking craze.

The challenge is daunting despite Yahoo’s huge audience of more than 600 million worldwide users a month, in part because Google and Facebook have all the momentum.

Blake Irving, Yahoo’s product chief, said he was confident the company would emerge stronger. The steps being taken now will pay off later, he said, and “we’ll be growing like mad.”

Ms. Bartz’s strategy is, in part, to refocus the company on its strengths, like news, sports and finance. Yahoo has invested heavily in content in the last year, hiring dozens of editorial employees and buying Associated Content, a freelance news site, to enhance local news coverage.

E-mail and instant messaging, among Yahoo’s most popular products, are also a priority.

Meanwhile, Ms. Bartz has cut costs by outsourcing services that are no longer central to Yahoo’s strategy. Personals, job listings and real estate are all now largely handled by third parties.

By far, Yahoo’s biggest move has been handing over its search engine and related advertising to Microsoft, its one-time search nemesis. The agreement allows Yahoo to forgo the cost of maintaining search infrastructure while still collecting most of the revenue from the partnership.

Yahoo can now focus on display advertising — banners and other graphical ads — where it remains the industry’s leader.

When Ms. Bartz joined, Yahoo was adrift after a bruising takeover battle with Microsoft. She was charged with regaining the trust of investors, who had attacked the company’s board for failing to accept Microsoft’s bid. She declined to be interviewed for this article.

To be sure, Yahoo’s situation isn’t as dire as some of Silicon Valley’s pundits imply. Yahoo remains profitable — it generated more than $1.3 billion in cash last year — and it still has a vast audience. It is to report third-quarter results on Tuesday.

The problem has more to do with the company’s direction. By many important measures, the business is essentially flat or modestly declining. Revenue for the first half of this year was $3.2 billion, up just 1 percent from a year earlier. And the number of minutes that users in the United States spent on the site in August was down 9 percent from August 2009, according to comScore. It’s a stark contrast with Google and Facebook, both of which continue to make big gains.

One large Yahoo shareholder, who asked not to be named because of his firm’s policy against commenting on investments, said he recently asked some members of Yahoo’s board to replace Ms. Bartz, over frustration with her performance. But they resisted, he said, because they were “afraid of making another bad decision.”

Yahoo responded by issuing a statement that said “we like our strategy and are very confident that we have the right people and are on the right path.”

Industry insiders are divided on what strategy Ms. Bartz should follow.

Salim Ismail, a former Yahoo executive who is now executive director of Singularity University, said Yahoo should convert from a publicly traded company to a private one to escape the pressure of quarterly earnings reports. Only then would executives be free to abolish the company’s complex organizational structure, which he said slows innovation and decision making.

“They’re putting on a Band-Aid when what they really need is major surgery,” he said.

Peter Thiel, a prominent Silicon Valley investor and Facebook board member, countered that Yahoo should not make any drastic moves. Big acquisitions — Twitter and the discount site Groupon are frequently mentioned as potential targets — would be misguided, he said, adding that the company should instead focus on what it does best.

Mr. Irving, a former Microsoft executive who was hired as Yahoo’s product chief six months ago, said Yahoo had much going for it, like its mobile phone initiatives and engineering talent. He talked up plans for more personalized features on the Web site, improved personalization of ads and more cooperation between product teams.

An epidemic of executive departures at Yahoo is adding to the uncertainty. Three top managers stepped down in the past few weeks, the latest in a series of exits that has almost completely reshuffled the leadership ranks since Ms. Bartz took charge.

Even with the turnover, Mr. Irving said Yahoo’s employees were not feeling demoralized or rudderless, as some critics suggest. He described the product teams as excited and engaged.

“What ends up getting picked up on more are the departures than the new people coming in,” Mr. Irving said.

Though there are plenty of critics, many people still want Yahoo to succeed. Some are sentimental about Yahoo’s early role in popularizing the Internet, while others are rooting for it because it brings more competition to an industry dominated by Google.

Paul Gunning, chief of Tribal DDB, a digital advertising agency, said Yahoo remained a great place for marketers to reach consumers. Some Silicon Valley insiders may consider the company irrelevant, but what’s more important is what millions of mainstream people think, he said, adding: “We’re bullish on them.”

Larry L. Cornett, a former Yahoo search executive who is now a technology consultant with Brilliant Forge, said that he was encouraged by the early stages of Yahoo’s turnaround, but that Ms. Bartz needed to clearly lay out what the company stands for.

“Maybe there’re some conversations internally, but from the outside, there isn’t a crystal-clear definition of what Yahoo means,” Mr. Cornett said.