Daily Archives: September 23, 2009

Investor Activist Pushing for Changes at Yahoo

If you thought Michael Arrington took Carol Bartz to task earlier today, you should check out the verbal drubbing she received earlier this month from investor activist Eric Jackson.

His blistering attack on Bartz at TheStreet.com is unsparing. Jackson builds a meticulous and merciless case against Bartz and her enablers on the Yahoo board of directors, a group that seems to have an inveterate predilection for approving outsize compensation packages for the company’s senior executives. I suppose the board members figure it’s only shareholders’ money, not theirs.

Jackson’s assault on Yahoo’s largesse toward its executive team is just the latest salvo in his fusillade against the company’s board members.

What Jackson finds particularly galling is that the executives’ stratospheric remuneration largely has been disconnected from the company’s performance. As he says at one point, he could countenance high-value executive compensation for high-value returns to investors; but that’s not what Yahoo shareholders have been getting. At the end of each quarter, they’ve been more likely to get a lump of coal than a shimmering diamond.

Adding insult to shareholders’ financial injury, Yahoo insiders have been selling their shares with alarming regularity. In Jackson’s words:

Insiders have bought $67 million in Yahoo! stock in the past two years. However, of this amount, the vast majority was bought by Carl Icahn for his hedge fund, which he has already sold (and more — $189 million) in the last two weeks. A small amount of stock was purchased by Michael Murray, Yahoo!’s chief accounting officer, who announced last week that he’s leaving the company. Not including Icahn’s and Murray’s stock purchases, Yahoo! insiders have collectively bought only $103,700 in stock in the past two years.

Over the same period, Yahoo! insiders have cashed out $233 million in stock.

While Bartz should not be held accountable for what transpired before her arrival at Yahoo, she should be held to account for her own actions and excesses. Bartz has been with Yahoo since January, but she’s already dumped shares valued at $2 million to cover her personal tax bill, according to Jackson.

After pressing his argument, Jackson kindly proffers suggestions as to how Yahoo can “fix this mess.” One of his proposals is that Yahoo’s compensation committee resign from the board of directors. Another is that the well-remunerated Bartz (she’ll collect more than $187 million over four years, presuming she hits her performance targets) should buy stock in Yahoo amounting to a significant chunk of her net worth.

Actually, all of his suggestions are worth reading, particularly if you’re a Yahoo shareholder.

Why Settlement with Joltid Appears Best Option for Skype’s Backers

Even as Skype continues to plot and execute what could be a lucrative enterprise strategy involving interoperability with SIP-based PBXes, a cloud hangs over it.

In the battle between Skype’s founders and its current owner and would-be investors, the sphere of engagement is not limited to the courtroom. There are unsettled technology issues, too.

Representatives of Skype and eBay have told the media that a technical “workaround” is being explored that would extricate them, and their prospective new investors, from the ongoing legal entanglements with Joltid and Skype’s original founders, Niklas Zennstrom and Janus Friis.

I have no question that Skype is assessing technical alternatives to the current Skype architecture, which is predicated and dependent on underlying peer-to-peer software licensed from Joltid. That software, which eBay had neglected to procure from Joltid when it bought Skype for $2.6 billion in 2005, is now the focus of a legal dispute between the parties.

The trouble for Skype is that a “workaround” does not seem technically possible. Instead, eBay and Skype’s new owners would have to recreate the service from the ground up, essentially starting all over again with a brand-new architecture. In this context, it is important to recognize that what is called Skype for SIP is just a server-to-server mechanism that provides interoperability between SIP PBXes and Skye, not a potential replacement for the Skype service.

Whatever emerges as a substitute might be called Skype, but it would be something else entirely, probably based on the industry-standard Session Initiation Protocol (SIP), which was mentioned above and has been widely adopted by wireless operators, telecommunications carriers, and enterprises of all sizes.

The current incarnation of Skype is based on Joltid’s proprietary P2P code. In its early days, the software did not play well with the evolving SIP standard, which was designed to facilitate and support not only voice communication but also videoconferencing and instant messaging. Skype supports voice, video, and IM, too.

For a long time, SIP and Skype developed on parallel tracks, providing similar functionality but not talking to each other, figuratively and literally. Skype got the market jump on SIP for a variety of reasons, some having to do with telco-versus-Internet political battles that encumbered and retarded SIP’s development in the IETF and other standards bodies.

Another major difference was that Skype, with its peer-to-peer architecture and its promiscuous approach to establishing communications sessions, was built to circumvent firewalls and network-address-translation (NAT) gateways.

From a technical standpoint, Skype’s facility for firewall and NAT traversal made it effective and easy to use. From a business perspective, the fact that it was free made it popular. That’s why Skype got off to such a great start, and why it has more than 480.5 million registered users.

If one’s strength also is one’s weakness, then Skye’s initial asset, its NAT-traversing peer-to-peer architecture, has developed into a potential liability, both legally and technically. With a key piece of the peer-to-peer architecture in Joltid’s hands, Skype and its current and aspiring owners must win the litigation or develop a technological solution that obviates the legal threat.

Unfortunately for Skype, as has been explained in this forum previously, a simple workaround – in the form of a patch or a software adjunct – doesn’t appear feasible. That means Skype and its backers must hope they prevail in the legal battle, or that they can build, from scratch, an entirely new service that will assume the Skype name.

Skype and its future owners won’t put all their eggs in one basket. They won’t sit back and count on winning in the courtroom. In fact, they’re exploring how to reconstitute Skype in a different form. The latter will take a lot of time, and presumably a lot of money. The cost, seemingly prohibitive, would have to be factored into any calculation of risk and reward.

There is one other possibility.

That third option involves a settlement with Zennstrom and Friis and their corporate vehicle, Joltid. Given the scenario I’ve just laid out, I think this alternative will be thoroughly investigated. There’s a good chance Joltid would drop the litigation if it were given an ownership position in Skype. Relevant questions then would be: How much do Zennstrom and Friis want, and how much would eBay and its new investors be willing to concede?

Regardless of how it ends, the story will be interesting to follow.

Yahoo’s Bartz Should Stop the Blame Game

I’m just not seeing how Carol Bartz and her executive team have set Yahoo on a bold strategic course that breaks with the past and takes the company into a bright future.

Not everything in Michael Arrington’s denunciation of Yahoo under Bartz is on target, but his criticisms put lots of checks in the right boxes. Like Arrington, I haven’t seen anything strikingly new from Yahoo since Bartz’ ascension. If anything, the company seems to be practicing the risky alchemy of addition by subtraction: abandoning search in exchange for Microsoft advertising lucre, slashing staff, dumping properties that don’t readily fit the consumer-portal mold.

It’s true that Yahoo was unfocused, and that it needed a narrower, sharper mandate.

What’s more, some of those expenditure reductions and were necessary, especially in a harsh downturn that has taken a jagged bite out of advertising revenue. That said, costs reductions only take a company so far. They help burnish an embattled bottom line, but they do nothing to grow the business.

Ultimately, Bartz’s challenge is to grow Yahoo’s business, to boost the top line. Does she have a coherent strategic plan to get it done? At this point, I’m not seeing it.

Under Bartz, Yahoo is precisely what it was before – a web portal for consumers – but without search. She admits that Yahoo’s natural competitor, the rival that looks more like Yahoo than any other company out there, is AOL. That’s true, but it can’t be comforting news for Yahoo’s stakeholders. AOL, after all, is another portal company looking to redefine itself, squeezed on one side by search and on the other by social networking.

Bartz needs to explain what Yahoo will do that will make it different, make it unique, separate it from the pack. She needs to articulate how it will continue to drive consumers to its virtual front doors and attract the advertising revenue that follows them.

At the same time, she has to stop attacking forces she cannot control and that, frankly, do not control her. Why does she waste so much time berating press and pundits? Every time she does it, I wince. It’s a waste of energy, a waste of time; and time, as the hackneyed adage goes, is money.

The fact is, Bartz will always have critics, Yahoo will always have critics. Then again, every CEO and every company has its critics. CEOs must have thick skin. They have to be able to withstand external criticisms, to be driven by the courage of their convictions and the certitude that they’re blazing the right trail. Bartz needs to stop trying to deflect blame for Yahoo’s struggles toward its external detractors. The critics beyond Yahoo’s walls don’t control the fate of the company. She does.

Something else she needs to stop doing is blaming the past regime for the Yahoo problems she hasn’t imputed to the media. There’s no upside to continuing a jeremiad against a defunct regime. She should be looking forward, not backward. Jerry Yang and his lieutenants might have bequeathed problems to Bartz and her team, but that’s why they’re there – to solve those problems. The new team has been brought aboard to boldly and confidently chart a new course, not to endlessly bemoan the baggage they’ve inherited.

Besides being pointless, her excoriations of the past regime are culturally poisonous. In attacking Yang and the Yahoo of old, she implicitly assails those Yahoo managers and employees who were left behind and remain with the company. Rather than rallying the troops under all-encompassing banner, she risks instigating an us-against-them dynamic, whereby the new members of the company are arrayed against the holdovers.

I’ve seen this dynamic play it out in a few companies, and the results are rarely salutary. The new additions, taking their cues from a new leader who is disdainful of the former executive leadership, suppose that the vast majority of those who preceded them at the company – including the teams they’re now managing – are part of a problem rather than potential allies in a solution. The new team often treats the veterans with barely concealed condescension. At the same time, the long-time employees resent the arrogance and superiority of their new bosses. Understandably, they begin to feel that their new leaders aren’t interested in their ideas and opinions.

Bartz likes to attack the “cynicism” of her media detractors. She should consult a dictionary because he’s not using the right word. Her critics are skeptical, not cynical. Given what she’s shown us heretofore, skepticism seems the proper stance.