Avoiding the Internet Death Spiral: More Advice for Yahoo

Includes: AABA, MSFT
by: Tim Sweeney

I have already provided my advice to Yahoo regarding what I believe should be their general management focus in What Should Jerry Do? My Advice to Yahoo.

Assuming they listen, are they out of the woods? No.

What is the biggest risk to the future of Yahoo? Is it Google? Is it Microsoft? Is it some new college genius working in his or her basement? No. The biggest risk to Yahoo’s success in the future is the loss of its employees' faith in management.

Many Internet companies promise a lot to prospective employees. They will be on the cutting edge of technology; they will be creating the future of the Internet; everyone will make a fortune on their options; and everyone will have a lot of fun. We are a team. We are a family. We are all in this together. In exchange, the employees sign up, receive options and generally accept a lower level of annual salary.

When things are going good, everyone is having the time of their life. They are making progress, the stock is going up and there are “high fives” all around (not just in the airport in Seattle). Everyone’s having fun, and everyone’s focused on their job and the future.

But what happens when the company hits a major roadblock or has trouble taking on a tough competitor. Well, the employees forget about being on the cutting edge of technology. They don’t think they’re creating the future of the Internet; they’re watching others create it. As the stock falls in price, their dreams of making a fortune are dying, along with their dreams of even having a job. And I can assure you - they are not having a lot of fun.

The employees are hoping every day to be rescued. They start looking more critically at the mistakes that have been made by management. As the stock falls further, there are assets at the company that become more attractive to potential buyers. The employees disagree with each other about the future of the company, which provides a distraction to the entire company. People start to look for other jobs. It becomes more difficult to recruit people. A company offers a premium for the stock, and the Board and the Founders turn it down flat.

We don’t want Microsoft. We do want Microsoft. We don’t want Google. We do want Google.

At this point, the company is about to enter the Internet Death Spiral.

What the Company Should NOT Do

With all the top level advisers, Harvard and Stanford MBAs, and brilliant investment minds, the typical reaction is to go back to what was successful.

Ok, so now what? Let’s take out the old script and jazz it up again! Hey, we are on the cutting edge right now. We really are creating the future of the Internet. Hang in there; we will be making a fortune. We just need to follow our plan. So let’s ignore this distraction and have fun again.

They might as well have said, ignore the man behind the curtain, the emperor does really have nice clothes, or the world is flat. Better yet, how about just saying, we are losing money on every sale, but we’re going to make it up in volume.

Hello? You have lost your credibility. You see, you may have gambled $400-$500 million on your decisions, but you still have hundreds of millions in cash and over a billion dollars worth of stock. What you did not realize is that your employees don’t have that kind of cushion.

More importantly, don’t treat your employees like they are idiots – they aren’t! They know the company’s faults; they know the management’s faults, and they know the competition.

Once you have lost some credibility, don’t throw all your credibility out the window by saying "we are all in this together," because you aren’t.

OK, So Now What?

Be honest with your employees. I understand that you have employee meetings already scheduled. So go ahead with your meetings. Review the script and the talking points. Have all the upper management attend the meeting and sit on the stage. Have someone announce your name and walk up to the podium, pull out the script, tear it up and throw it on the floor and give the following speech instead.

    I want to thank you all for coming. We have had a difficult few months. Before I continue, I want to thank my executive team for supporting me and the company. But I also want to ask them to please step down from the stage and take the seats in the front row. Thank you.

    Now I am standing all alone in front of all of you. I started this company and I am the CEO of the company. But one thing I have learned from the past few months – it’s not my company. It’s your company. It’s the stockholders company.

    I fully believe in this company and our future. But I am here alone on the stage, and I have to tell you, we have made some mistakes. I have made some mistakes. But I am the CEO and I take responsibility for those mistakes.

    I don’t think it was a mistake to turn down the Microsoft offer, for either our employees or our shareholders. If we made a mistake, I think it was in talking to them at all. David and I started this company with three central ideas – to have fun, do something we love and make a little money.

    Well, we accomplished that, but somewhere in this journey, we became billionaires and lost our focus. We may have hired some management that did not fit the spirit or the culture of our business. That was a mistake. In our meetings with Microsoft and Steve Ballmer, I realized that Microsoft is a great company and Steve is a great executive. But we already made that mistake once, and I didn’t want to make the same mistake again. It simply was not a good fit.

    Now I know some of you are saying – sure, it’s easy for you to turn down the money. You’re set for life. I am. I have made a lot of money, a lot more than any one person really needs. Our focus in creating this company was to have fun. Somehow we changed our focus to place more and more emphasis on making money, on owning every application on the Internet, on destroying our competition.

    And you know, I have given this a lot of thought. That’s Microsoft’s (NASDAQ:MSFT) focus, and increasingly that’s Google’s focus. I think that is the wrong focus, especially for us. What would Pepsi be without Coke? Where would Microsoft be without Apple (NASDAQ:AAPL)? Where would Steve Ballmer be without the Monkey Dance? Competition forces us to give our best efforts.

    Now don’t get me wrong for one minute. I am not saying we will be second in anything we do. All I am saying is - we don’t have to do everything. To that end, we will be redoubling our efforts in our core businesses, and yes that does mean we will be keeping search and competing against Google (NASDAQ:GOOG).

    To compete, we will need to find ways to operate more efficiently and cut expenses. Does that mean we are going to cut people? Not necessarily. We need to focus our employee resources better, and as we grow, we need good people. And we will need even more good people in the future.

    We need to make strategic acquisitions where they make sense and can increase the value and breadth of our core businesses. We need to stay on the cutting edge of technology, but we always don’t need to own every technology or every application.

    Let Microsoft concentrate on X-Box, on the Zune, or the Surface computer. Let them be Darth Vader trying to chase everything down in the universe. Wise be we. Persistent and focused we are. Fear is the path to the dark side.

    [Walk down off the stage and stand in front of the crowd]

    I know some of you are disappointed. I know some of you are fearful. Thirty-one dollars a share or $33 a share, that’s a lot of money to some of you. But I really think the company is more valuable.

    I trust the company. I trust the management. But more importantly, I trust you. I trust the employees. We are a team, a great team.

    Now I know I’m asking you to put trust in the company, trust in the management and, more importantly, trust in me. So I have decided that I need to show you how much I trust you.

    I am personally going to guarantee the first 2,500 shares held by every non-executive employee at a sales price of $35 in eighteen months from now. In other words, I will give every non-executive employee working at the company today the right to require me, if they so desire, to buy 2,500 shares of Yahoo stock or vested options (earned through our stock compensation system) on January 1, 2010, if they are still employed by the company at that time or if they have been terminated by the company without cause before that time.

    Now we all are a team. Now we are all in this together. Now let’s go have some fun.

    Thank you.

That’s what Jerry should do. That’s what I would do. Will he do it? Or does he like his money more than his company?

You tell me.