Yahoo!’s New Business Plan

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The best business plan for Yahoo! (YHOO), the one probably most likely to succeed, does not come from CEO Jerry Yang and his new management team.

Widely regards Bernstein Research suggested late last week that YHOO out-source its search to Google (GOOG) and fire 25% of its staff. Each move has been suggested before. The famous "Peanut Butter Manefesto", written by a Yahoo! manager last November, insisted that the company focus on few businesses and sharply cut staff. Just last week, the media caught wind of the fact that Yahoo! had recently considered allowing Google technology to handle its search. Because the Google product is more efficient at finding results it gets a better ad yield from each search. Yahoo! could make more money by turning to its rival.

But Bernstein has put a number to it. The big portal could "boost 2008 operating income by $565 million" by giving Google its search franchise. "Cutting a quarter of the staff could add another $658 million in operating income", according to the research report, covered in Barron’s.

For a company with $1 billion in operating profit a year, the Berstein plan could push up the Yahoo! share price to $40 or more, which is where it traded in early 2006.

The fact is that nothing Yang is doing now will help Yahoo! very much. Buying companies with better display advertising target gets the portal further into a part of the industry where growth is slowing.

If Yahoo! has a grand plan to dig itself out of its current mess, no one at the company has articulated it. Some times the best plans for companies come from outside. This is clearly one of those cases.

Douglas A. McIntyre