Internet Outsider

Meet the New Yahoo!... Same As The Old One?

Good news and strange news.  Good that Terry went gracefully and (as he put it) "sooner rather than later."  Strange, though, about Jerry taking over as Terry's apparently permanent replacement. 

I like and admire Jerry greatly, and his passion and leadership has been invaluable to Yahoo over the past 13 years.  He also knows the Internet business cold.  To my knowledge, however, Jerry has never had an operating management role of any kind, not even at the working-group level.  And he's now assuming command of a global Fortune 500 corporation.  (Management experience ain't everything, but it's something).

Valleywag assumes the appointment is temporary, but the press release sure isn't written that way (If the intent is temporary, why not say so?).  Also, once again, the new management responsibilities are carved up in a bizarre multi-fiefdom fashion, in which Sue has control over the "business" and Jerry over "technology."  Perhaps someone can explain how Yahoo's business can be separated from its technology?  How can Sue drive the business without having control over the technology?  How can Jerry make technology decisions without controlling the business?  What is going on here?

Here's what I hope is NOT going on here.  I hope that Yahoo's board is not simply incapable of making clean, crisp decisions.  The bureaucracy thing has plagued Yahoo for years, and it seems as though it might continue to do so. In my mind, the most sensible arrangement would have been Jerry as Chairman and Sue as CEO and the heck with all this fiefdom crap.  Sue has run a big percentage of the company for years, and she ran a division at DLJ before that.  If Jerry's role is going to be largely inspirational and visionary (which Lord knows the company needs), then in my mind he should be Chairman, not CEO.  But perhaps there's some method to the strangeness that someone can enlighten me about.

In any case, thanks again to Terry for six years of service and a gracious exit, and long live the new Yahoo!

UPDATE:

I gather they smuggled a second-half earnings whiff into the conference call.  Well done.  Terry's leaving in the nick of time...

No More Earnings Guidance? Hallelujah.

Judith Burns of the WSJ reports that the Center for Audit Quality has signed on to support a series of guidelines called the Aspen Principles, which aim to reduce Wall Street's obsession with short-term performance.  Among the guidelines is a recommendation that companies stop giving earnings guidance, and, even more important, stop commenting on analysts earnings estimates.  In other words, act like Google.

I don't think anything will change Wall Street's ever-more-frantic trading horizons (short of the eventual realization that almost all trading hurts returns), but I couldn't agree more with the guidance recommendation.  The "beat expectations" game is absurd, and the only way to begin to eliminate it is to transform analysts' estimates into actual estimates. 

Back when Google went public, a chorus of whiners complained that Google's no guidance policy was going to burn investors because analysts would set estimates too high and Google would miss them, etc. All of this was really about one thing: Analysts were shocked at the thought that they might actually have to estimate.  But they did.  And, at first, the estimates were so low that Google blew them out, then so high that Google missed them, then just a little bit too low.  And so on.  And a few years later, everyone's used to wacky no-guidance Google, and life goes on.

One reason Google chose not to provide guidance--and one reason the Aspen Principles recommend against it--is that guidance forces companies into short-term thinking, too.  When you know your stock will open down 30% if you miss the quarter by a penny, well, you'll damn well find that penny, even if it means sacrificing a dime or two down the road (or futzing with your accounting reserves).  If, however, you establish that your earnings are going to be unpredictable and lumpy, and relentlessly refuse to provide any additional commentary, your shareholders and the market will gradually come to expect this.  And you'll be able to say--and perhaps even be believed--that the reason your earnings were lower this quarter than analysts estimated is that you saw some opportunities to invest (or because, god forbid, you had a disappointing quarter.  Horrors!).

Guidance is silly.  Let (make) the analysts analyze.  Follow in nutty Google's footsteps and make your business decisions for the long-term.  If some hotshot money manager complains that he has to be accountable for quarterly performance so why shouldn't you be, tell him to buy someone else's stock.

Shot Heard Round the Yahoo

(We hope...)

Activist Eric Jackson and other frustrated Yahoo shareholders won big at the Yahoo! Annual Meeting yesterday, even though the company's recommended slate of directors still passed.  Persuading nearly a third of normally rubber-stamping shareholders to vote AGAINST management is a major success, and one can only hope that Terry got the message. 

Terry's remaining supporters usually point to the stock's having gone up a lot since he joined the company and suggest that Yahoo's current woes are merely a temporary lull that all good companies go through.  This defense ignores that the average stock in the industry is up a lot, too (NASDAQ has doubled), and that a competitor that barely existed when Terry joined the company is now worth 5 times as much as Yahoo. 

Yahoo's failure to maintain its lead in search and instead concentrate on more traditional media efforts was a colossal strategic error that Yahoo's shareholders will forever have to pay for.  Everyone makes mistakes, of course, and Terry's experience helped Yahoo through a challenging period after the dotcom crash.  The skills required to return Yahoo to Internet greatness now, however, are different than those that helped stabilize it in the bust. 

Terry believes he has the Internet-greatness skills, and he's certainly been paid as though he does.  Despite his confidence, however, every day that goes by sees Yahoo fall further and further behind.  So no wonder a growing number of shareholders think it's time for a change.

WSJ Bancrofts: Hallucinating Again...or Just Stalling?

The NYT reports that the Bancrofts have "refined" the ludicrous proposal they made to Rupert Murdoch a few weeks back in which they, not he, would have control over the selection of the Journal's senior editors.  The proposal was absurd, in part because it would have left ongoing operating decisions in the hands of a fragmented family that already has no interest in making them and in part because the main point of buying an asset is to be able to control it.  So Murdoch politely dismissed it. 

But now, the Times reports, the family will present a refined version of the plan, which sounds little different than the prior version.  This means one of three things: 1) The family is still hallucinating, 2) The new plan is unenforceable (which would be allow the Bancrofts to save face and still give Murdoch what he wants), and/or 3) the Bancrofts are just stalling, hoping a more respectable bidder will emerge.

CBS's Moonves Sees the TV News Future...And It Is Bleak

Lost in today's dust-up between Dan Rather and Les Moonves over Rather's explanation for CBS News's tanking ratings was a bleak--and accurate--portrayal of the future of TV's evening news shows.

In case you missed it, Rather said the CBS Evening News is in a tailspin because CBS tried "to bring the 'Today' show ethos to the 'Evening News,' and to dumb it down, tart it up in hopes of attracting a younger audience."  It is understandable why Moonves dismissed these remarks as sexist, and it's also understandable why Rather wants to believe that things would have been different if he hadn't blown himself up in the Bush-National Guard forgery fracas.  But the argument is a sideshow.

Moonves is right that unless CBS can find ways to skew the Evening News audience under 60 years old, the show is toast.  He's wrong, however, when he implies that the choice of the right anchor, or style, will accomplish this.

The evening news shows are dying for the same reason the newspapers are dying: the next generation of viewers/readers are getting their news online (or from Jon Stewart).  Because the online medium is simply a better medium for delivering news, nothing the TV networks do will change this trend. 

NAR: Don't Worry, Housing Prosperity Just Around Corner

Off topic, but I can't help but note the similarities between the dotcom-crash rhetoric/predictions back in 2000 and the housing-crash rhetoric/predictions in the last 12 months. 

Those of you who had the misfortune to live through the dotcom crash will recall that I and other analysts correctly predicted that there would be a slowdown and shakeout, but drastically underestimated its severity and duration.  All the way down, we kept revising forecasts (read: cutting estimates) to previously inconceivable levels, and each time we cut them, we reiterated our expectation that the inevitable trough and upturn was about six months away.  It wasn't until two years after the shakeout began, when half of online advertising revenue had evaporated and more than 75% of the companies in the sector had keeled over that the downturn finally ended... And by that time, most of us were so demoralized that we'd stopped predicting that there would ever be an upturn.

Housing obviously won't experience as deep a correction as the dotcoms did, but I haven't heard a single persuasive argument explaining why this downturn won't look like every previous housing downturn: i.e., will last a lot longer and drop much farther than most people think--until price/rent and price/income ratios return to or below their long-term trend.  Instead, all I hear are arguments like this one, which are based not on long-term historical trends, but on short-term bubble-year pricing and price trends (arguments I am very familiar with, having made similar ones in late 2000 and early 2001):

WASHINGTON -- The National Association of Realtors again lowered its U.S. housing market forecast for this year, saying the market remains "soft." In its latest forecast for the real estate market, NAR projected that existing home sales will fall 4.6% this year to 6.18 million, compared with its previous forecast of a 2.9% decline. New home sales are expected to plummet even further. The NAR said new home sales are likely to fall 18.2% to 860,000, compared with the prior forecast of a 17.8% drop. While near-term prospects for housing remain fairly grim, NAR said sales should pick up toward the end of the year.

"Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom," said Lawrence Yun, NAR senior economist, in a statement. "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," Yun added. Existing home sales are projected to rise 3.7% in 2008, to 6.41 million, according to NAR's forecast.

WSJ Reporters Praying Burkle Will Save Them. And How About Google or Yahoo?

The rate of hyperventilation in Wall Street Journal offices presumably slowed yesterday, after a potential Not-Murdoch savior emerged.  After much groveling on the part of Dow Jones employee union head Steve Yount, LA billionaire Ron Burkle has apparently agreed to at least take a look at the Dow Jones deal.  More from the AP's Seth Sutel...

Meanwhile, the hunt is on for other potential white knights.  A savvy friend suggested Google or Yahoo.  The acquisition would be a tuck-in for either (for Google, anyway), and there would certainly be no worries about overbearing editorial control (because neither company is really in that business).  But still seems a long shot.  Not because there wouldn't be synergy--there would.  Just because the move would require a major commitment to a single vertical.

Bancrofts Meet Murdoch, Continue to Hallucinate

Amusing portrayal of yesterday's Bancroft-Murdoch meeting in the NYT: Bancrofts propose ludicrous plan in which they, a fragmented family with no operating media experience, get to elect members of a journalistic-integrity-enforcement-board that Murdoch, the company's owner, will have no control over.  Murdoch's understandable and apparently polite response?  NFW. 

In the interest of Bancroft face-saving, these silly meetings will probably continue for a while, but unless GE or another, more journalistically-respectable suitor jumps in, the deal is as good as done.

Congress to Close Stock-Option Tax Loophole?

WSJ reporting that Sen. Carl Levin (D. Mich) is up in arms about a tax loophole that gives technology and other heavy-option-granting companies a financial advantage over their cash-comp brethren.  The loophole saves companies billions in cash taxes, and if it is closed, the tech business will become more capital intensive.

The current tax code allows companies to deduct the cost of options against taxable income when they are exercised--by treating the employee's gain on the option (the difference between the exercise and strike price) as compensation expense.  This makes sense, because the cost is compensation expense.  The trouble is the that, on GAAP and pro-forma income statements--the income statements that investors see--companies expense options using Black Scholes or another option valuation method.  This usually results in the option income statement expense being far less than the option expense reported to the IRS (The WSJ reports that from 2002-2006, the option expense reported to the IRS was 7 times the amount reported on income statements).

There would be two ways to close this loophole: 1) force companies to show the same larger expense on their income statements as they do to the IRS (i.e., reduce GAAP profits), or 2) force companies to use Black Scholes, et al, for tax reporting.  Since the latter method would result in higher taxes, it is likely the solution that Congress would pursue. 

Bancrofts Come to Senses and Agree to Sell Dow Jones

...To Murdoch or anyone else willing to pay nearly twice as much as the stock's normal market price.  No, the family statement didn't say that they had agreed to sell Dow Jones, just to chat with Murdoch et al, but that's what it means.

Look out CNBC.  And the New York Times is now presumably in play, too...

From the family statement:

"After a detailed review of the business of Dow Jones and the evolving competitive environment in which it operates, the Family has reached consensus that the mission of Dow Jones may be better accomplished in combination or collaboration with another organization, which may include News Corporation.

"Accordingly, the Family has advised the Company's Board that it intends to meet with News Corporation to determine whether, in the context of the current or any modified News Corporation proposal, it will be possible to ensure the level of commitment to editorial independence, integrity and journalistic freedom that is the hallmark of Dow Jones.

"The Family also indicated its receptivity to other options that might achieve the same overarching objective."