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Yahoo: What went wrong?

Outdone by rivals Google and Facebook as well as its own missteps, the once-dominant internet giant prepares to sell off its core operation.

Once a dominant portal on the Web, Yahoo today is seeing its revenue declining at a double-digit pace as it closes a round of bidding to buy its struggling core business operations.

Outflanked and outmaneuvered by Google and Facebook during the last decade, Yahoo was said to be considering bids as low as $3.5-$5 billion, well below the $10 billion the company said its core business was worth even a few months ago.

What went wrong?

Yahoo’s troubles have been nearly a decade in the making.

The company, founded in 1994 by two Stanford University graduates, grew quickly, survived the dot-com crash in 2000 and saw its ad sales increasetenfold between 2001 and 2008.

Overtaken by upstarts

But, according to analyst Richard Kramer, web portals became outmoded as search, messaging and social media came into play.

Kramer said Yahoo was overtaken by services like Gmail and Hotmail in its search and advertising businesses while Huffington Post and other sites brought news aggregation.

Kramer said Yahoo was also slow to adapt to increased consumption of video and use of mobile devices.

He said management churn also hurt the company between 2008 and 2012, the period after co-founder Jerry Yang left as CEO but before Marissa Mayer replaced him.

Salaries uncompetitive

Meanwhile users were flocking to other platforms and Yahoo’s advertising sales – its main source of revenue – began to falter. But as revenues stalled and then dropped, Yahoo was unable to pay top salaries to compete with rivals for the best sales talent.

Yahoo still has more than 200 million users a month in the U.S., making it the third largest in traffic, but users spend relatively little time on Yahoo’s sites, finding other platforms more engaging.

Mayer, who joined Yahoo after a rock-star turn as a technology executive at Google, attempted to bolster Yahoo with acquisitions, including the mobile analytics service Flurry and the Tumblr blogging platform.

Yahoo CEO Marissa Mayer

Yahoo CEO Marissa Mayer

Mayer also made significant investments in mobile products and grew Yahoo’s mobile audience to 600 million users a month. But none of the company’s apps rank among the top 50 in Apple’s U.S. app store. By comparison, Google and Facebook own eight of the top apps.

Mobile revenue falters

Mobile advertising generated only $250 million in revenue for Yahoo in the first quarter of the year, compared to $4.5 billion for Facebook.

On an earnings call Monday, Mayer reported that revenue was down 20% from a year ago.

Most of Yahoo’s total value of more than $30 billion comes from the company’s share in Alibaba, the Chinese e-commerce colossus and in Yahoo Japan. Those assets are not part of the current sale.

While the board reportedly said in March that it wanted $10 billion for the core business, Fortune reported that earlier bids were closer to $3.5-$5 billion. However, not all the bids are for the same assets and some experts believe the total sale could go as high as $6 billion.

Telecoms among bidders

AT&T and rival Verizon are among the bidders along with private equity firms and a consortium led by Quicken Loans founder Dan Gilbert with financial support from Warren Buffet, chairman of Berkshire Hathaway. Yahoo closed the bidding on Monday and an announcement is expected soon.

Yahoo has separately begun selling off non-core assets including patents that could be worth as much as $4 billion, and real estate while closing several online magazines.

Experts are predicting cost-cutting ahead under new ownership. Mayer is already reducing jobs by 15% as part of a cost-cutting effort this year.

More job cuts predicted

But one analyst said more cuts will likely be required to bring Yahoo’s costs in line with industry standards.

Robert Pack, an analyst with Suntrust Robinson Humphrey Inc., said Yahoo costs are “bloated,” and a new owner might cut as many as 3,000 more jobs.

Mayer was resistant to a sale, but she stands to receive a generous payday if one goes through.

She is entitled to severance pay and benefits totaling nearly $55 million in the case of a “change of control” such as the sale of the company, according to a regulatory filing. Mayer would receive $3 million in cash and nearly $42 million worth of restricted stock and options. Mayer was paid $36 million as her regular compensation in 2015, down from $42 million the year before.



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