Yahoo!'s Misguided Manifesto

Heads don't need to roll at the Internet giant -- except for one.
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So, now heads must roll at Yahoo! (YHOO) . If so, I'd like tonominate the first one: Brad Garlinghouse.

Who is Brad Garlinghouse? He's the Internet's own Charlie Brown, a Yahoo! senior vice president prone to griping about peanut butter in his fatuously titled "Peanut Butter Manifesto," in a stark revelation of the managerial crisisthat has swamped Yahoo!'s headquarters, is being taken far too seriously.

The manifesto, apparently written last month, surfaced Saturday on the blog of

TheStreet.com

contributor

Paul Kedrosky

and was quickly picked up by major news outlets. Yahoo!'s stock was off 18 cents in early Monday trading to $26.74.

It's not exactly the kind of manifesto that would make Marx and Engels envious. It whines about Yahoo! workers who "hang around." It makes bizarre boasts like "I bleed purple and yellow" (so do some insects) and "I shaved a Y in the back of my head." Most of all, it churns out vague demands such as "the current business unit structure must go away" and that hoary cliche, "heads must roll."

Garlinghouse is crystal clear, though, on a few points. First and foremost: "I hate peanut butter. We all should." (Right. Tell it to the starving children.)

More worrisome to investors, however, is the idea that Garlinghouse wants to shut down some of Yahoo!'s more innovative new businesses before they've proven themselves, cut ranks by 20%, and hold executives accountable for poor performance.

Here again, Yahoo! should start with accounting for Garlinghouse's performance. Under his watch, Yahoo! Messenger let a huge opportunity for voice-over-Internet protocol, or VoIP, slip through its fingers as

eBay

(EBAY) - Get Report

snapped up Skype. And Yahoo Maildropped behind

Google's

(GOOG) - Get Report

Gmail as the most prestigious Web-based email domain.

That performance has been more chunky than smooth, yet Yahoo! hasgotten off easy. Earlier, Garlinghouse was CEO of VoIP leader Dialpad, which promptly spiraled into bankruptcy, but not before Garlinghouse laid off 90 of his 140 employees. A 2002 case study of Dialpad in the

Harvard Business Review

discussed how Garlinghouse struggled with a failed business model while rival Net2Phone won a $1.4 billion investment from

AT&T

as well as deals with

Microsoft

and Yahoo!.

Before Dialpad, Garlinghouse was a venture capital investor at

CMGI

(CMGI)

, one of the most spectacular dot-com blowouts. Its stock has fallen from $164 in 2000 to $1.40 today. CMGI wasn't content to be an overvalued, money-losing Internet company; it wanted to breed dozens of them, some under the brown thumb of Brad Garlinghouse.

In 2003, Garlinghouse drifted into Yahoo!, where a signature deal was acquiring -- no kidding -- Dialpad to create a VoIP division you've probably never used. It's not clear if Garlinghouse owned any of the Dialpad shares that Yahoo! bought in the transaction, but Dialpad seems to have since morphed into one of the superfluous lines of business that Garlinghouse is now advocating shuttering.

Let me be clear about where I'm coming from: I'm neither long nor short Yahoo!. I have never worked there.

But I use its site daily, and I have interviewed smart, entrepreneurial people there who, if laid off, wouldn't have trouble finding a job at one of Yahoo!'s fast-growing rivals. I'd even bet the Peanut Butter Manifesto's leak has inspired some of Yahoo's more valued workers to send out their resumes.

That's what happens when memos surface urging a company to kick as much as 20% of its staff to the curb. One in five Yahoo!s? Good grief. Where did that figure come from? It sounds like a big number somebody pulled out of his peanut butter jar, one meant to make a dramatic point. Sad to say, it did just that.

This is a move that, long term, will hurt Yahoo! investors as much as anyone. Along with Google, Yahoo! is one of the brightest beacons of innovation in the Internet sector -- which, far from retrenching, still has the potential to drive revenue and profit for years, if not decades. What Garlinghouse advocates is dimming that beacon and snuffing out promising ideas that could bring new revenue streams.

The worst thing about this panic-room strategy is that it's a complete capitulation to Google right when Yahoo! finally has a shot, with Panama, at improving its share of the search-advertising market. Sure, Yahoo! is losing its momentum. But this response is a power play not from an MBA textbook but from Machiavelli.

Just because some start-ups that Garlinghouse incubated at CMGI deserved mercy killings doesn't mean the same fate should befall young projects at Yahoo!, where the technological know-how is deeper and project management is more seasoned. Cutting back is sure to weaken Yahoo! when it should be growing.

But why take my word for it? Here's Garlinghouse in that 2002 Harvard case study on the peril of "irrational" layoffs: "If you cut your headcount, you destroy your ability to grow ... so you cut your headcount again to reduce burn. The result: a death spiral!"

If Yahoo!'s top executives give in to Chainsaw Charlie Brown, the stock will surely pop. But when it does, Yahoo! investors would be smart to cash out ahead of the death spiral. Do not pass go. Do not look back. Just take the money and run. As for Yahoo!, the grief will not be good.