An Open Letter to Jerry Yang and David Filo

Dear Jerry and David:

I am writing this letter to you as a loyal Yahoo! user since 1996. Who could have imagined that, what started out as an experiment in the Stanford computer lab in 1994, would grow to become what is today a media titan? Who would have imagined that, 12 years later, you would be working in a megalopolis in Sunnyvale, rubbing elbows with heads of state, and -- most importantly -- positively influencing the lives of millions of Yahoo! users?

I knew Yahoo! was a special company when, about 10 years ago, I was writing my doctoral dissertation at Columbia Business School on the effects of officers' and directors' backgrounds on their firms' IPO and post-IPO performance. With the help of a couple of Columbia College undergrads, I was coding the IPO prospectuses for all the software and restaurant/hotel chain IPOs between 1994 and 1996. Yahoo! was a different kind of company the moment I saw the two of you listed as Chief Yahoos! on the management team. Since then, you've only gone on to prove to everyone what a special organization is Yahoo!

Although the historians might quibble, there have really been two phases in Yahoo’s development as a company: (1) under Tim Koogle's leadership and (2) under Terry Semel's leadership. You both had a hand in selecting these CEOs and both were right for their time.

Terry Semel was appointed CEO in 2001 and he has had a number of big accomplishments over his tenure. These include:

1. Stability. After the deflation post-bubble, Terry brought a sense of calm and order. He righted the ship when it was needed. Numerous Yahoo! executives complimented how he instituted a number of policies and procedures which helped give a greater sense of stability to the organization.
2. SBC. The first of its kind, Terry played a role in doing the deal with SBC that married Yahoo!'s rich content with broadband. It's proved to be a dynamite deal for Yahoo! in the years since.
3. Media expansion. Terry's brought 24 years of Hollywood contacts and know-how and helped build on Yahoo!'s initial foray into new media and accelerate it. Today, richer content is available on Yahoo! in more breadth and depth that any other site. Although companies like Brightcove and Joost get ink for what their plans are in internet and TV, Yahoo! is leading the way. 'The Nine' is a model of what's to come, as we continue to move forward.
4. Overture. As the WSJ reported, Yahoo! snapped up Overture where MSFT feared to tread. In retrospect, this was a huge blunder for them and win for you.
5. del.icio.us & Flickr. Need we say more? Huge accelerators for Yahoo!, showing how a large platform can take a great idea and move it to the next level.
6. Jack Ma. Alibaba.com's investment was a stroke of genius for Yahoo! from 2 respects. It gave you a foothold into a market leader in China (just as the early Yahoo! Japan-Softbank deal did back in the day) and it gave you (indirectly through Alibaba) a great leader in Jack Ma -- someone who will play a key role as Yahoo! moves ahead in the coming years.
7. Engineering Excellence. Yahoo! has always coveted this trait. It's what made you what you are and is what will see you through the next 20 years.

Why it’s time for Terry Semel to go:

Despite these great successes, there came a time for TK to move on and now is the time for TS to pass the baton. Here's why:

1. He’s going to be 64 in February 2007. Neither you both nor Terry expected that this job would last 10 years. Five years has been suitable to make the changes he and you both wanted him to make. He has certainly left Yahoo! a better place than how he found it. Now is the perfect time to enjoy retirement, moving back full-time to Bel Air and making a significant contribution to a number of important boards across the country.
2. He’s lost the support of Wall Street. Following last quarter's disappointing results vis-a-vis Google and with Panama's delay, there is pressure from Wall Street to demonstrate that he's in control of this ship. The continued excuses given, and the reports of discontent from within the organization (see below), have exacerbated this problem within the last few weeks.
3. He’s lost the support of the Yahoo!s. Everything published in Valleywag needs to be taken with a grain of salt. Yet, reports of booing within internal company meetings are not helpful. A few weeks ago, we published a post on what steps Terry could take to turn things around within Yahoo! It was surprising to read the number of strong comments that came back from current or past Yahoo!s which displayed such strong emotion against Terry. It's clear the organization would respond well to a fresh approach. The "Peanut Butter Manifesto" is not a direct indictment of Terry, but it is symptomatic of a general malaise existing within the ranks showing that change is necessary -- and now.

What Should be Yahoo!'s Phase Three?

Let me clear. If a change is not made now, I think there is substantial risk that the organization will be taken out as a stand-alone firm. Microsoft, Comcast, Disney, Google, Viacom, and even News Corp. would love to add this jewel to their collection. I don't believe Yahoo! users, employees, and shareholders would be best served by this. What's more, the hedge funds are starting to circle. There will inevitably be suggestions of their own for what actions to take. You need to get ahead of this train.

It's easy to point out problems, but what are some solutions? What is needed now at Yahoo!, beyond just a new CEO for the sake of one, to take it into its third phase of growth for the next 5 - 10 years?

1. Dan Rosensweig will have to go too. Dan has also failed to be embraced by the Yahoo!s. There is a distance which appears to exist. No leader can drive an organization forward when this trait is present and it's a difficult thing for the leader himself to flip the switch on and change. Quite simply, the Yahoo!s will not follow Dan as their leader. He is also seen as too close to Terry. This will be difficult. It was difficult to say goodbye to Jeff Mallett, but it was for the best of the organization.
2. Internal CEO over External. All the academic studies agree that an internal CEO is a less risky proposition than an external one. However, an external CEO is needed when the organization needs a dramatic shift. You both were more than justified to make that shift 5 years ago when you brought in Terry. The environment is different today. A respected internal leader would be embraced and rallied around by the Yahoo!s. You have the perfect candidate within your midst.
3. Don't appoint a COO. Recent evidence exists that appointing a COO is linked to negative firm performance. Apparently, CEOs who appoint COOs are out of touch with some of the important operational aspects of the business.
4. Your continued product leadership will be critical. Most organizations don't have the benefit of the two sage founders continuing to play an active and helpful role. You have made a huge difference to Yahoo! in the last 5 years and you will continue to be strongly needed as we move into the company's phase three, especially on the product side.
5. Elevate more internal talent like Jack Ma, Bradley Horowitz and Brad Garlinghouse. Jack has been a great addition you've picked up through acquisitions and investments (through the investment in Alibaba.com). Bradley is playing an important role with your "talent brickhouse." Reward their hard work and show the rest of the Yahoo!s that success gets rewarded. Don't shoot the messenger with Brad. Thank him for his passionate memo by rewarding him. Demonstrate to the entire organization that Yahoo! welcomes this passion; it doesn't try to snuff it out.
6. Indefinite Moratorium on Celebrity Appearances at Yahoo! The stars of this company are its employees. This isn't Hollywood. This is a business. Celebrities don't bring up team morale; great leadership does. Tom Cruise has left the building and let's keep him and other A-listers away.
7. Articulate the Vision. The new CEO must articulate a definitive vision for Yahoo! As I said above, you have a vast array of assets. You can truly define how we will all interact with the Web and rich content moving forward. Yet, the company's leadership has failed to. Into this vacuum, the Skype guys have wrestled this opportunity away from you and are seen - currently - as the 'thought leaders' with Joost. It's not too late. Take back the mantle by having Yahoo! blare its vision from the hilltops and then achieve it!
8. Streamline, Streamline, Streamline. Kudos to Brad for identifying this in his manifesto. Yahoo! has become bloated and -- consequently -- inefficient. Let me quote him: "• YME vs. Musicmatch • Flickr vs. Photos • YMG video vs. Search video • Deli.cio.us vs. myweb • Messenger and plug-ins vs. Sidebar and widgets • Social media vs. 360 and Groups • Front page vs. YMG • Global strategy from BU'vs. Global strategy from Int'l". Inefficiency = opportunity. Just streamlining these areas alone should go a long way towards the cutting headcount by 15 - 20% that he suggests.
9. Build a Culture of Personal Accountability. This starts from the top, but through effective performance management, challenging assumptions, pushing for change, rewarding success, and learning from (as opposed to burying or chastising) failure, you will ensure that no one at Yahoo! will ever say "that's not my job." Everyone has to have a vested and maniacal interest in seeing this organization achieve its vision.
10. Reconnect with the "!". As companies grow, they must build in process and policies. They cannot operate like a 10 person, 'cowboy culture' start-up. But the best companies remember their roots. Yahoo! has incredible roots. To me, it all goes back to the "!". Somewhere in the last 5 years, Yahoo lost its "!". It's still there and the Yahoo!s need to be reminded of it. When they are, I'm sure they'll rise to the challenge like they never have before.

You both control 9% of this organization. You are the co-founders. You have a responsibility to make the tough calls that will ultimately take this company to its next level of development. I applaud your continued passion and the courage you've demonstrated through the last 12 years. We will support you and we will support Yahoo!.... Leadership starts at the top.

Sincere regards,

Eric Jackson

Update: 6/20/07: In January, we launched a "Plan B" Community to gather Yahoo! shareholders who want to propose a new way forward for Yahoo! which will greatly increase shareholder value compared to the past 2 years. Go here to sign-up to the community: http://www.youchoose.net/pledge/yahoo_shareholders_unite_for_plan_b.

You can also read our finalized "Plan B" here: http://breakoutperformance.blogspot.com/2007/02/finalized-plan-b-sent-to-yahoo-today.html.

This is the first time shareholder activism has utilized the web, blogs, and wikis. We have a wiki version of the current iteration of our "Plan B" here: http://yahoo.wikia.com .

We wish Jerry, Sue, and David the best of luck in this exciting new stage for the company.

Sphere: Related Content