Yahoo Is Pleasing Investors, Instead of Its Users

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f 2010 wasn't a bad enough year for Yahoo (YHOO), it's ending on an especially sour note. After watching rivals capitalize on the social and mobile aspects of the new Web, Yahoo moved to "sunset" various properties it set up or bought in recent years. But its handling of the announcement turned into a public relations nightmare, leaving many in the tech world with the impression the company is not only running out of options but blowing the few it has left.

Investors don't seem to have much conviction one way or the other about Yahoo's strategic moves: The stock has traded in a narrow range for the year and trades under $17 per share -- close to its year-ago levels.

But Yahoo's users can't be too happy. The company is ending 2010 on an especially sour note, with a new round of layoffs and its move to sell or shut down popular services like Delicious, drawing a chorus of criticism in the tech press.

Alienating Users?

As Yahoo flips the calendar to a new year, that dichotomy sums up its dilemma. Ever since Yahoo angered many shareholders for rebuffing an attractive takeover offer from Microsoft (MSFT), it has aligned its strategy to make shareholders happier. But in the process, it seems to be alienating users, which can't be good for the bottom line.

The decline in the company's brand among its users is slow, but increasingly perceptible. Its overall audience, measured by unique monthly users, is growing slower than the Web's overall audience. As a result, Yahoo is sliding down the list of the Web's biggest names.

Late last week, ComScore, which tracks Website usage among other things, reported that Facebook surpassed Yahoo as the third-largest Website in the world. Yahoo is now No. 4 (behind Google and Microsoft also). Only five years ago, it gave up its No. 2 slot to Google.

Facebook's success has bedeviled Yahoo this year, partly because -- as Yahoo CEO Carol Bartz made clear in an interview at the Web 2.0 conference last month -- the company sees many of its services as social. "We've been social for a long, long time," Bartz declared.

That's true, but it's like saying horse-drawn carriages were around a long, long time before cars came along. Both Yahoo and Facebook are social, but in dramatically different ways. Facebook is obsessed with all the ways people interact with each other on the Web, and it tweaks its site accordingly. Yahoo seems content to get people socializing in a Web 1.0 kind of way: email, bulletin boards and new twists like Answers.com.

Stuck in the Past

And that points to one of the biggest factors hamstringing Yahoo: The company's DNA is still that of a 1990s "portal" -- a centralized site attempting to structure the Web, whereas the Web is very much decentralized.

Take a look at Yahoo's home page in December 2010. The streams of updates from friends that are the center of Facebook and Twitter content are absent (except maybe the Facebook and Twitter links near the bottom of the page). Now look at Yahoo's home page as it was five years ago. The content is very much the same -- what you'd want from an all-in-one portal. Except that many users don't have a use for all-in-one portals anymore.

Yahoo tried to move into social media by buying popular sites like del.icio.us and Flickr. The results included no successes. Instead, they ranged from mixed to disastrous. Del.icio.us (renamed Delicious) was so deeply integrated into Yahoo's core technology that one former insider believes it can't be sold off. Flickr was granted more autonomy in Yahoo, but it still moved toward the margins of the social web.

Not the Right Strategy for the Web

Bartz's moves to reduce staff and eliminate some of Yahoo's less popular features is likely to please investors, at least in the short run. Corporate turnarounds routinely involve such moves, and Bartz's strategy appears to combine some old-fashioned cost-cutting with a push to innovate into new technologies.

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And that points to the second problem facing Yahoo as 2011 approaches: That hybrid model won't work in the Web sector. Slashing costs and shuttering operations can be effective tools in turning around manufacturers and software companies. But even though the Web is designed with software code, these same strategies seem to have a contrary effect. They drive away top talent and telegraph to users that the brand is fading. And after a while, revenue from advertisers starts to dry up.

Yahoo's recent moves may make investors optimistic. But unless the company starts taking a radically different approach to its site's content, 2011 will be a year of a shrinking audience and a diminished brand. If so, no amount of cost-cutting can keep Yahoo's stock rising much longer.