Smash hit

“We are able to reach hundreds of millions of users. That will ultimately lead to great success. If you try to run your company by what the press and analysts are saying, you’d be changing your strategy and zig- zagging every two months.”

However, as the Garlinghouse memo makes clear, it’s not just external commentators who are worried about Yahoo. One senior executive who quit earlier this year said: “As the business has got bigger and has expanded so quickly in lots of different ways, a lot of people have lost their fire. They’ve lost a lot of reasonably senior people in the US and in Europe. I couldn’t really operate at the speed and level that I wanted to.”

These cultural concerns, of great interest in Silicon Valley, would not matter if Yahoo was performing better. But the constant comparison with Google, whose shares passed through $500 last week, paints the older business in a poor light.

It is important to remember that Yahoo is a much more diverse business than Google. Although Google’s moves into e-mail, instant messaging and video generate huge publicity, it is still overwhelmingly used simply as a search engine.

In the UK, for example, 84% of Google’s traffic is from people using its search engine, according to Hitwise, the internet data firm. Add in image search, and the total rises to 90%. Only three other websites — including the recently acquired You Tube and Google Mail — account for more than 1% of the total traffic.

By contrast, Yahoo has 13 properties that each generate at least 1% of its traffic in Britain. Yahoo Mail is the biggest draw, with just under 27%. The UK portal attracts another 20% and Yahoo’s search engine is the nextbest used, with a 12.6% share.

The problem with this better-balanced business is that search advertising is by far the best way yet discovered to make money from the internet.

There is a second, more serious problem. Google’s approach to pay-per-click advertising is much more effective than Yahoo’s. With Yahoo, the advertiser who bids the most on a particular keyword automatically gets the highest ranking in the list of sponsored ads generated when the word is typed into the search engine. Perhaps counter-intuitively, Google makes more money because its listings take account of what ads are clicked on by users — favouring those which help them find what they are looking for.

In America, Merrill Lynch has estimated that Google generates 11 cents on each domestic search, almost three times as much as the four cents that Yahoo makes. That is a huge differential.

Yahoo readily admits it needs to do better, but it is only now starting to roll out its new Panama advertising system, several months behind schedule.

With acquisitions of young start-ups such as Flickr, Del.icio.us, Upcoming.org and Bix, it is not hard to sympathise with Garlinghouse and wonder how Yahoo manages to keep a track of them all. In America, Yahoo’s directory lists more than 100 separate services, yet the company admits that few people use more than a handful of them.

Yahoo’s hope is that its initiatives in “social media” — its users’ contributions to Answers, Flickr and the like — will improve its search results, allowing it to combine human knowledge and judgments with the power of computers.

But this is a complicated message to get across when the financial results continue to pose difficult questions. Earlier this month, Yahoo’s co-founder David Filo dismissed the pessimism: “Today we are in a more exciting position than when (we started 12 years ago).”

Garlinghouse, meanwhile, seems not just to have survived his attack on his bosses but to have prospered from it. He has been appointed to head a working group to examine the issues his memo raised, and report back in two months.

As Henry Blodget, the internet analyst turned blogger, ruefully observes: “Given that most of the complaints/recommendations can be grasped in 0.2 seconds, this two-month rumination period seems an example of exactly what Garlinghouse is complaining about.”